I’m the Messenger, Not the Fearmongerer

Hear this listener’s complaint, and decide if he’s right

Ric Edelman: It's Monday, September 11th, 22 years ago on this day. (pause) Hey, I've been warning you about the coming cuts in Social Security. We all know that the Social Security Trust Fund is in trouble. At least I hope you know this.

Let me give you the background in case you're not familiar. The Social Security system works in a very simple way. Workers pay Social Security taxes a total of about 15% of your pay. Half of that comes directly out of your paycheck. Your employer pays the other half. And Social Security takes all of that money, puts it into a piggy bank, and then distributes it to retirees in the form of Social Security retirement benefits. Well, that system has been in place since 1935. But go back to 1935, way back when there were not very many people living beyond age 65. And in fact, we had an awful lot more workers than we did to retirees. 150 workers, in fact, for every retiree.

Today, of course, our demographics are very different. Instead of having 150 workers per retiree, we have less than three. In other words, we aren't putting enough money into the system via payroll taxes as we need to pay all the benefits that we owe to all the retirees because retirees have not been dying at as young an age as they were predicting back in 1935. You were supposed to be dead by 70. Today, people are living into their 80s, 90s and hundreds. So where does Social Security get the difference? I mean, if we're taking all the money from payroll taxes and paying them out to retirees, but that isn't enough money. 

Well, then where are the retirees getting the rest of the money from the Social Security Trust Fund? Remember, go back 50, 80, 100 years ago. We had more workers putting more money into Social Security. Then Social Security needed to pay the benefits out. That meant the surplus sat in a piggy bank. It's called the Social Security Trust Fund. But because of the changing demographics, we are now paying out in benefits more than we're collecting in taxes. And to make up that shortfall, the Social Security Administration is tapping into the Social Security Trust Fund.

By 2030, maybe as late as 2032, the trust fund will be depleted. At that point, the only money available to Social Security beneficiaries will be the taxes that workers are paying into the Social Security system. And those taxes are only enough to pay about 76% of the total benefits that retirees get. This is the coming Social Security crisis.

Under current law, Social Security can only pay out in benefits what it collects in taxes, which means starting somewhere around 2030 or 2032, everybody in retirement is going to get a 23% or 24% reduction in Social Security benefits. This is a fact. The only way we solve that problem is for Congress to fix it. And there are only two basic solutions Congress has. They either cut the benefits or they raise the taxes to maintain the benefits or some combination thereof. That's about it.

So far, Congress has been unwilling to do either of the above, because, after all, is whoever gets elected cutting benefits or raising taxes? So every Congress kicks the can down to the next Congress. And, well, here we are. The message I've been conveying to you for years on my radio show and now this podcast has been to be aware of this problem: Number one, to encourage your elected members of Congress to fix it. But number two, to factor this into your own retirement planning calculations. Don't assume that the current retirement benefit that Social Security says you're going to get is, in fact, what you're going to get if Congress doesn't act. The current benefit that you see on your Social Security statements, if you go to SSA.gov, your actual benefit will be about 25% less than that.

So with that in mind, I got an email last week from Garrett. He's a financial advisor and he sent me this message to Ask Ric at TheTruthAYF.com. You can do that too if you ever have a question or comment. Anyway, Garrett said, “Ric, will you please stop with the fear mongering nonsense about Social Security where you state that Social Security benefits are going to get cut or you're going to face a double digit tax increase.”

Well, I'm sorry, Garrett, but I'm not trying to monger fear. I'm trying to warn folks about what is going to happen. Garrett suggested that we could reduce the benefits that high earners get to solve the problem. Sorry, Garrett. You're in denial.

And I hope everyone else isn't making the same mistake Garrett is making. All the analysis done on this situation shows that if we reduce the benefits that rich retirees get, I mean, think about it. Does Warren Buffett really need to get his Social Security check? He's 93 years old and he's been collecting that check for 30 years. Does he really need the money? I don't think so. I think some would argue we could eliminate Social Security benefits for billionaires. Why stop there? Let's eliminate Social Security benefits for mere millionaires as well.

I don't care where you use the cutoff point, Garrett, every study done on the subject shows that reducing the benefits that rich retirees get or raising taxes only on wealthy people, that's not going to work for the simple reason there aren't enough of them. You could cut out benefits for everybody making $250 grand or more. It's not enough. The vast majority of people in this country earn substantially less, and that means they're the ones who are getting the bulk of the benefits paid out by Social Security.

Just to drive home the point, the Committee for a Responsible Federal Budget, that's a nonpartisan, nonprofit organization, they don't support either political party, they just released the latest study on this. And their study shows that if Congress does not act, retirees will face a $17,000 cut in Social Security benefits starting in 2033. That's a 23% reduction in the benefits that the average middle class dual income retired couple gets. Even low dual-income couples will see an $11,000 cut in income and the cut for high dual-income couples, $23,000 a year they're not going to get.

And by the way, all of those numbers are before inflation. Remember, this is based on 2023 calculations, which means it'll actually be worse by the time we do get to 2033. And some say, like I told you a moment ago, the cuts are going to start sooner than 2033, as early as 2030.

I'm not trying to scare you, Garrett. I'm not trying to scare anybody. But I am trying hard to alert you about what's going on so you can adjust the advice that you're giving to your clients. Garrett, don't have your head in the sand as an advisor. You have a fiduciary obligation to be talking with your clients about the Social Security crisis. And if you're not, you're doing them a major disservice. And if you are the client, you need to talk to your financial advisor about what's happening with Social Security.

So Garrett is wrong when he accuses me of fear mongering about this crisis. Garrett, what I'm saying is not a myth. There are some Social Security myths out there. And tomorrow I'll tell you what they are.

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