What the Depletion of the Social Security Trust Fund Means for You

Michael Saylor's trailblazing bitcoin strategy at MicroStrategy Plus, a college degree in Esports

 

Ric Edelman:  It's Friday, November 15th.  On today's show, a conversation about Social Security, retirement security, and the current status of the Social Security Trust Fund. Also, I have a pretty cool announcement for you.

Before we do that, though, I'm going to take a question from Larry. He's in Oregon. Here's what he asked.

Larry: "Hi, Ric. As a proponent of bitcoin, I'm curious as to your perspective on the growth formula Michael Saylor has instituted for MicroStrategy."

Ric Edelman: Yeah, it's a really good question Larry, considering the excitement that is going on in the world of bitcoin these days. Let me share with you, for those who don't know, what is happening at MicroStrategy and who is Michael Saylor?

Michael is the chairman of MicroStrategy. MicroStrategy is a business services company. A business intelligence, business consulting enterprise, profitable company. Well run, it's been in business for decades, but it’s real claim to fame has nothing to do with any of that.

It's claim to fame is that Michael Saylor, the founder and chairman of the company is a maximalist, meaning Michael Saylor believes very strongly in the future of bitcoin. He believes that bitcoin is a revolutionary asset and is an incredibly important tool useful as corporate reserves.

So, let me back up just a little bit of a moment here. Every big company, if you look at the Fortune 500, look at the S&P 500, all big companies, and I think it's ideally true of every company, but certainly of the biggest ones, they all make a lot of money and they have to figure out what to do with that money.

Do they invest the money into research and development, into expansion, into product growth, into distribution of their products? Do they expand into new markets? Should they take some of the money and distribute it to shareholders as a dividend? Should they use the money to acquire other companies?

What is it that a company ought to do with the profits that it produces? Well, these are pretty important questions that companies have to figure out, and until they figure out what to do with the money, they have to park the money somewhere. They've just got to hold on to it until they figure out how to dispose of it, how to invest it, or spend it, or what have you. This is known as corporate reserves. Big companies have lots of money in corporate reserves. Often, I think the grand total right now of the S&P 500 is somewhere in the neighborhood of three or four trillion dollars that these massive companies are collectively sitting on, in cash reserves because they haven't decided what to do with it.

They haven't yet needed to spend it on R&D, they haven't yet decided what other companies that want to acquire. Haven't yet decided to distribute the money to shareholders as dividends. So, they are sitting on all of this cash. And they don't want to literally sit on cash because cash doesn't earn any interest and they want to be able to get some return on this capital. So, they typically invest it.

Well, where are you going to take a half a trillion dollars if you don't have any immediate use for it, but you need it available in case a use occurs. Well, you can't buy bank CDs. No bank will take that much money. So, where do you put it? You put it into U.S. Treasuries. That's what these large companies typically do, which is why corporate reserves are often referred to as treasury reserves, because this is their corporate treasury. It's their treasure chest full of money and they invest it into U.S. Treasuries, the safest investment in the world that is also highly liquid, meaning the money is not only earning interest for now, but it's available as needed on demand for them to use in the conduct of their business.

Michael Saylor, as the Chair of MicroStrategy has recognized that his company has a lot of corporate reserves as well. But he has decided that rather than have this money sitting in a Treasury, which is barely earning the rate of inflation, and in fact, in many cases, many years, doesn't even earn as much as the inflation rate, certainly net of tax if that's the case.  He recognizes that having money in cash reserves in corporate treasuries is a losing proposition. Net of inflation, net of taxes, the company's actually losing money. And his attitude is: why on earth does it make sense for MicroStrategy and for its shareholders to place all of this money into a losing investment?

And so, Michael decided some years ago, back around 2018, that a better place to park the cash is bitcoin. And ever since Michael has been a big proponent of this strategy and he's been encouraging other corporations to do the same thing. Not very many have followed suit. A couple of them have, but not very many. He continues to espouse this, and he believes that all companies ought to do this, and he also believes that all companies eventually will.

Michael has not only, however, taken MicroStrategy’s cash reserves and put them into bitcoin. Michael has gone a step further. Michael has issued bonds. He has borrowed money from investors paying zero interest on those bonds. saying to those investors, if you want, you can convert your bond holdings into equity of our company. So, this is called a convertible bond. You can convert your bond into stock in MicroStrategy in the future, if you wish to do so. In the meantime, he's paying little to no interest on the money that he's borrowing and he's taking the money that he's borrowing and using it to buy more bitcoin.

He also has issued more shares of stock, selling part of the company to investors who are instead of buying it, are lending their money via bonds, they are buying a piece of the company and he is taking the money that they are investing in the company and he's also using that to buy more bitcoin. It has gotten to the point that MicroStrategy is the biggest corporate owner of bitcoin in the world. MicroStrategy owns more than 1% of all the bitcoin that exists. And along the way, that translates into more than $12 billion worth of bitcoin.

Michael Saylor has earned so much money off of his bitcoin trade, that the profits MicroStrategy has earned on bitcoin's growth has dwarfed the profits that MicroStrategy has earned from its business intelligence company. Meaning that most investors today look at MicroStrategy, not as a business consulting investment, but as a bitcoin investment. In other words, it's kind of like a proxy for Bitcoin.

And that is what takes us to Larry's question. What do I believe about the methodology Michael Saylor is using for MicroStrategy? My viewpoint? It's kind of brilliant. Michael is not only investing his own money into bitcoin, he's borrowing money at an incredibly low rate of interest to make a further investment into bitcoin. If it fails, it's the lenders who are suffering the risk, not him. If it succeeds, he enjoys the profit along with the investors. This is kind of a brilliant strategy.

It's also a pretty good strategy for the investors who are lending him the money because Michael is posting MicroStrategy as collateral against that loan. So, if bitcoin does go broke, the investors will own MicroStrategy. So, they have some downside protection that you normally don't get if you're simply buying bitcoin directly.

This is a pretty clever idea by Michael Saylor, and I believe it's going to be replicated by a lot of other companies over time. It has gotten to the point that investors are so excited about what MicroStrategy is doing that when you look at the price of MicroStrategy stock and you compare it to the price of bitcoin, MicroStrategy stock is now trading at about three times as much as the value of the bitcoin that MicroStrategy owns. In other words, if MicroStrategy owns $10 billion worth of bitcoin, just to pick a number, it's actually closer to $15 billion, but let's just pick an easy number. If the bitcoin that MicroStrategy owns is worth $10 billion, the price of the stock is worth about $30 billion, meaning investors are paying more for the stock, a lot more, than the underlying value of the bitcoin. Why would the investors be willing to do this? Well, some of them are oblivious. They don't know that this is the case. They don't know they're paying a 3:1 premium.

Others, though, take the attitude that this is worth it. Because the reason that the multiple is justified is because of the leverage that Saylor is engaging in. By buying bitcoin with borrowed money, you inherently create leverage. Is 3x the correct multiple? Maybe it ought to be 4x, which means MicroStrategy stock has a long way to rise, or maybe it only ought to be 2x, which means MicroStrategy stock is going to fall by a lot. So, I don't know if MicroStrategy is the best way for you to be buying bitcoin. You need to make that decision for yourself.

I can simply tell you that an awful lot of people like the idea of MicroStrategy as their bitcoin proxy, because at the end of the day, MicroStrategy is a stock available for you to purchase in any brokerage account, just like any other stock. And unlike an ETF, which has expenses, even though those bitcoin ETFs are incredibly low in expense, you know, typically around 20 basis points, MicroStrategy as a stock is often flat out free because a lot of brokerage firms allow you to trade stocks commission-free. So, is this the right way to go? I'll let you decide that.

I can tell you that if you're interested in owning a diversified approach to bitcoin, owning bitcoin directly through an exchange like Coinbase, owning bitcoin through a fund like one of the ETFs, owning bitcoin through the proxy of MicroStrategy, all of these are legitimate approaches. You just have to decide which of those you favor or what combination of them you favor. But it's a legitimate play and it's a fascinating one. And Michael Saylor has established himself as one of the most prominent and outspoken proponents of bitcoin. You'd do well to pay attention to what he has to say and the rationale he uses for justifying his strategy.

If nothing else, it is a good source of education.

 

Let's move on now to our other topic. I've got a pretty cool announcement. I've got nothing to do with this, but it's got my name on it, so what the heck, I'm going to mention it to you. At Rowan University, is the Ric Edelman College of Communication and Creative Arts.

The university named this school in my honor several years ago. I was a graduate of the College of Communications at Rowan, and I was very honored and grateful that they named the College of Communication and Creative Arts in my name. They have now expanded their program at the college. They are now offering a brand new Bachelor of Arts degree in a new field.

Esports. Yeah. Those teenagers who are sitting in the basement, playing video games, driving mom and dad crazy. You can now get a college degree in this subject. Only about 20 colleges offer this degree nationally and at Rowan, they offer it in three different tracks, communication, business, and computing.

The coursework is offered through the Edelman College of Communication and Creative Arts, as well as the Rohrer College of Business, the College of Humanities and Social Sciences, and the School of Professional Studies. You can also minor in Esports at Rowan. You can also get two certificates of undergraduate study in it. This is a highly specialized degree. The communication track is designed for students who want a career in reporting, broadcasting, public relations, and social media. The business track is for students who want a career in financial management, accounting, and accounting operations and strategy. And the computing track is for students who want to focus on media design, coding, and mobile app development.

Yeah, can you imagine that you can go to college and get a degree in electronic sports? This is really no longer just for high school kids playing video games in the basement. Global Esports is a $2 billion market right now, and it's projected to hit $9 billion by 2032. This is a tremendous opportunity for generating revenue for gamers, organizers, influencers and game developers. There's even international prize money for teams who play these games at the professional level. The opportunity to earn high income is really pretty significant, and that is why Esports is now a professional career choice. And demonstrating your proficiency and expertise by holding a college degree in this field makes you pretty marketable.

The classes at Rowan are limited to 15 to 25 students. The classes are online. Well, of course they are. This is an Esports degree, but the Ric Edelman College of Communication and Creative Arts at Rowan University has also built a 7,000 square foot facility that houses 70 powerful high-end gaming consoles. There are also 10 of them on a stage and 10 more in a private room for competitive teams. There's space in this facility for 300 people. So, it's going to be a big draw for students who like to play or watch Esports competitions. Really? Watch? People would sit around watching other people play video games?

Yeah, the Dota 2 Championships last year were was watched live by over half a billion people. This is an incredible demonstration of the innovation that is occurring in technology, leading to the mainstreaming of these new techs, by virtue of being able to get a college degree in it. What a wonderful illustration of the evolution of college and why your kids need to be looking at college and the opportunities that exist in new and different ways.

I'm really proud that at Rowan University, they are among the elite schools around the country, one of the few that are offering a degree in Esports.

 

One of the big topics that we talk about periodically on this program is Social Security, retirement security broadly, and the current status of the Social Security Trust Fund. I think everybody is now pretty much aware of the fact that the Trust Fund's being depleted. And the most recent data suggests that it'll be gone in 2034, 10 years from now with big income implications for America's retirees and policy implications, therefore, for Washington. And not just an issue for current and near retirees, but equal implications for people who are very far away from retirement because it's those people with jobs, the taxpayers, who are going to be footing the bill for the Social Security account, just as it's been in place for the last nearly100 years.

Let's delve into all this and understand what is going on. What's happening? What's going to happen? What might we do to adjust our own personal planning and policy issues as a result? So joining me is Jason Fichtner. He is a Ph.D. and Chief Economist at the Bipartisan Policy Center. Jason, It's so good to have you here on the podcast.

Jason Fichtner: Hi Ric. Thanks for having me back on again. It's good to be here.

Ric Edelman: Jason is the Executive Director of the Retirement Income Institute. He's also on the board of FINRA's Investor Education Foundation. And most to the point right here, he is the former Acting Deputy Commissioner of the Social Security Administration and was SSA's Chief Economist.

He was also a Senior Economist with the Joint Economic Committee in Congress. So, this is the guy who really knows from the inside out what's going on here. And you've recently written a paper, Jason. In fact, we've got a link to the paper, that you've got at protectedincome.org.

We've got a link to it so everybody can obtain that and read it, which I strongly encourage folks to do. Let's begin with challenge facing future retirees, those not in the situation right now, but one day they will be. We used to call all of this a three-legged stool. We don't do that anymore, do we?

Jason Fichtner: No, but we should go back to it and reimagine it. So the three-legged stool concept, which I thought was really good to talk with regular people about financial planners and policymakers, was you think about a stool with three legs. It's very sort of balanced and secure. It doesn't wobble over when you’ve got three legs. And when thinking about retirement security, those three legs consisted of your Social Security, your employer provided defined benefit pension plan, and your personal savings. Those three things together gave you the income you needed in retirement to provide security.

Well, now those three legs are much different. Social Security has, as you mentioned at the start of the segment, has financial challenges where the main trust fund for the OASI (Old-Age and Survivors Insurance) program, the retirement program, will be depleted within nine years.

The DB system, not many people have a defined-benefit pension plan anymore. If you do, you're mostly a government worker, but like 4% of private sector workers have access to a DB plan. And most people now have access to retirement savings through a defined contribution plan, or like a 401(k). And then personal savings is challenging for many people. So, we need to rethink this three-legged stool because Social Security does need to be solvent, but what does that mean? What does it look like for benefit changes or tax changes?

We’ve got to help people have more personal savings. And that defined-benefit leg really now is a defined-contribution leg. We need to help people understand how they can take those assets they accumulate and convert that into income in retirement because we’ve got them so used to saving, saving, saving, but they're too afraid to spend, spend, spend in retirement. We have to think holistically about what that means for retirement security.

Ric Edelman: And let's begin with the Social Security Trust Fund. As I mentioned and as you've just said it'll be depleted in the next decade. When that happens according to current law, the benefit is going to get cut what 23% or 24%?

Jason Fichtner: This is where it's important to think about the Social Security, Trust Fund. So, for people to understand that Social Security by law does not have its own borrowing authority. And when Social Security is running surpluses, that's when the point when payroll taxes were exceeding benefits being paid out, money was going into this Trust Fund. And it was all going into special issue treasuries, so T-bills basically.

And now we're actually collecting less revenue than we're paying out. We've been drawing down from the treasury bonds over time. And as the time gets depleted, Social Security can only pay out in benefits what it collects in revenues. Payroll taxes.

Ric Edelman: And that's about enough to pay 76%, 77%.

Jason Fichtner: 77% to 80%. I think it's easier to tell folks imagine you're going to get a 20% haircut overnight. That's kind of the way to think about this. And Congress has to do something or that's the default, right? The default is not something else.

Ric Edelman: I just find it so funny we've heard all three of them say it. We heard Joe Biden say it, we've heard Kamala Harris say it, and we've heard Donald Trump say it. All three of them have been very quick, very deliberate to say, we're not going to touch Social Security. Of course, what  I think they mean by that is that we're not going to reduce your benefits. But what they're failing to acknowledge is that by not touching Social Security, they're guaranteeing a 20 percent cut in benefit.

Jason Fichtner: That's exactly it. And this is what gets me when we talk about politicians, I understand campaigning and trying to promise everyone a chicken in every pot, and now we have politicians promising to give you the pot as well as the chicken. But it really is disingenuous when thinking about Social Security because you're right. If they promise not to do anything, what they are basically saying is we are giving you the default. And the default is 20% benefit cut when the Trust is depleted around 2033 or 2034.

Ric Edelman: So, what might individuals do about this? I mean this show isn't the focus of our policymakers in Washington who really don't care what I say right here. They might care what you say, but they don't care what I say. But individual investors and their financial advisors, what actions can these folks take?

Jason Fichtner: So I think there's two things to consider. The first is always good to hope for the best but plan for the worst. So, the first thing is let's assume that Congress does nothing, the president does nothing with Congress, and there is going to be an across-the-board benefit cut somewhere in the early 2030s.

Now, whether that lasts for a month, two months, a year, until Congress gets its act together, we don't know. But people should plan with their advisors for having an interruption in Social Security benefits or reduction in benefits, which could be temporary or permanent. They should plan for that and then that be part of their current investment strategy and retirement income strategy.

The upside is if you plan for the worst and you get something better, you're just better off. So, better to be better off than to be worse off.  I think you plan for the worst and hope for the best. The second thing is, it's hard for anyone to imagine a Congress, whether it's made up of Democrats or Republicans, letting Social Security and seniors having a 20% benefit cut overnight. It's just hard to imagine.

But we have seen Congress go to the cliff on a lot of things, the budget, debt ceiling, they just seem to like these fiscal cliffs and I can no longer guarantee that Congress will do something responsible before the irresponsible action actually happens. So, I think we've got to plan for and keep pushing politicians to have some actual courage, but we should plan for it.

Ric Edelman: Yeah, I agree thoroughly with you. I also do believe that it will be a cliff because that gives them political cover. This way they're able to say to their voters, I had no choice but to raise taxes or to reduce or delay benefits because the alternative would've been much worse. And this political cover is I think, what is absent at the moment because hey, they’ve got 10 years, why do it now?

Jason Fichtner: Yeah. And to your point though, it'd be one thing to say we're not gonna touch Social Security. And being misleading on the challenges that are ahead of us. It's also I think more misleading and downright, disingenuous to start promising additional benefits or to say we're going to stop taxing tips, we're going to stop taxing Social Security benefits for recipients. Maybe not tax Social Security for firefighters and police. But we can't even afford yet to pay for the benefits we've promised. Why don't we start figuring out how we're going to pay for those first before we start promising additional benefits?

Ric Edelman: So, given your strategy of hope for the best, plan for the worst, do you think that advisors generally are doing enough to help their clients adjust their expectations of what they're going to get down the road?

Jason Fichtner: I think they're starting to and I use the word start. Usually when we talk to financial advisors and Ric, you know this too, you ask them, what risks do you talk about with your clients?  And they'll say, we talk about longevity risk. We talk about market risk. We talk about inflation risk. We talk about health risk, sequence of return risk.

I'm now asking them to talk to their clients about political risk. Who's going to be in The White House and Congress in the early 2030s, and what does that mean for Social Security and the income people are going to need in retirement? That change of talking about it as a risk helps people refocus their challenges they need when thinking about their retirement needs. And so we've started seeing some advisors do this, and I think more and more are going to do it, as we continue getting closer and closer to Trust Fund depletion, because you're going to hear more shows like this one.

Ric Edelman: What a sad state of affairs that one of the risks we have in our life is the risk of politics. I mean, isn't politics supposed to be benefiting us, not a risk threatening us? That's a sad commentary.

Jason Fichtner: It is, and this is coming from my role at the Bipartisan Policy Center. I've made a joke before, Ric, and I'm sure you've probably heard it is the Bipartisan Policy Center is actually, this is not a joke, but it's the only organization registered in the District of Columbia with the word bipartisan in its name. And as an economist, I see it as both a demand and a supply problem. And this leads to what the joke is. That, when I first got here several years ago, I literally had people on the streets saying you're doing God's work. Thank you for being bipartisan.

But now today I get attacked from both sides saying, no, we don't want to compromise. It's our way or the highway. And that's coming from both sides, which makes the job of getting these issues, these challenges we need to do, done, much, much more difficult.

Ric Edelman: Sad commentary indeed. So again, on the context, given this scenario that we find ourselves stuck in, it all comes down to personal action. We can't rely on the politicians to save us. We don't know what they're going to do or when they're going to do it. And we're not going to be able to influence them terribly much either in that effort. But what we can do is alter our own personal behavior. And one of the things that drives me craziest, you cite in your paper, 96% of Americans who file for Social Security benefits, we all get to do this at some point, 96% you say are not getting the maximum from Social Security that they're entitled to. Only 4% percent of them get it, right?

Jason Fichtner: This is an important thing for us. A lot of people don't understand how the Social Security claiming formula works. And this is partly a Social Security problem because they talk about this and I think in a very misleading way. We talk about the early eligibility age, Ric. That's age 62 when you can start getting benefits. We talk about age 67 as the normal or full retirement age. And then there's age 70. So let's start with age 62. That is actually, we should call it the minimum monthly benefit age. But people hear early eligibility and who wants to be late for the retirement benefits, right?

No one wants to be late. And so they think that, oh, I'll just get it early because if I delay, I'm losing money. But the way the program works is if you were scheduled to say, get $1,000 at your full retirement age, which is 67 for me, you would get $700 if you filed at age 62. A 30% reduction in your monthly benefits.

Ric Edelman: And forever.

Jason Fichtner: Forever, for the rest of your life. If you wait until 70, you'd get $1,240, a 24% increase. But the difference between that $700 and $1240 is 77%. Where else can you get a 77% raise in your monthly income by delaying claiming? And this is what's important. I understand for some people who are age 62, they might actually need the money today. If you need it, take it. But if you can afford to delay claiming, it is one of the most beneficial things you can do to help secure your retirement of any choices you have.

Ric Edelman: This thing goes up basically on average around 8% percent per year.

Jason Fichtner: 8% a year.

Ric Edelman: That's a return even the stock market would be jealous about.

Jason Fichtner: Yep. And then we start talking about age 67 again, we call it the normal, or full.  What's normal about retiring at age 67? And full implies you can't get any more, which of course you can. So, we need to change the nomenclature. I've talked to advisors and say start telling people there's the minimum monthly benefit age and the maximum monthly benefit age. As soon as people hear minimum-maximum they'll start asking you what does that mean?  And what should I do?

Ric Edelman: And forget about the middle of the 67 nonsense?

Jason Fichtner: Just the two end points and figure out what works best for you and how you can afford to maybe delay claiming.

Ric Edelman: So sometimes, I have had conversations with investors who get it, who understand what you've just described. Now, everybody gets it who's listening to this, the age 62 versus age 70. But then they say, in order for me to get that big extra money, I’ve got to wait till 70, that's eight years that I'm not getting any benefits. What if I start at 62, take the monthly money, throw it into savings and investments. And pile it up until I’m 70, wouldn't that be a better deal than waiting to 70?

Jason Fichtner: And you just gave the answer 30 seconds ago. By delaying each year, you get roughly 8% return. So, you've got to beat not only the 8% per year, but realize that the 8% percent you're getting from Social Security is then inflation-adjusted for the rest of your life. So, you've got to do not just better than eight, but even counting for inflation, maybe I do better than 10% a year, every year you're delaying your deferring claiming. So, if you can do that, then that's a good business model for you. But no, that's a tough one to meet for eight years.

And I think we're also beginning to realize again, we were talking about the three-legged stool, what we're trying to do when you think about retirement is you're not trying to maximize your return. You're trying to minimize your risk, about living your money and making sure you have enough to last for your life and also preserving your lifestyle. So, in some ways, we start talking about is income should be the outcome in retirement.

And that's a hard framework because people have been so used to saving, saving and saving, getting a return. They get to retirement, whether it's a partial retirement, or full retirement, however they do it, but they're so used to saving, they have a hard time spending. They don't know how much they can afford to spend.

They don't know how long they're going to need the money for. What advisors can do is help with a spending plan and talk about Social Security and how the claiming strategy fits in with high monthly income, what assets they have, maybe taking some of that asset and converting some of that into a personal pension from your 401(k) plans. You're getting some more protected income on top of Social Security.

But that's how we have to start talking to people now about thinking about income as the outcome in retirement. To make sure they have what they need to have the lifestyle they want for the rest of their life

Ric Edelman: The other comment I get from people is what if I die? You're telling me to delay my benefit and then I die. I end up with nothing. Therefore I’m going to take the early money at age 62 at least I get something.

Jason Fichtner: So, one joke and one seriousness, the joke is if you're dead, you're dead. So, everything people have told me so far is when you die, you can't take it with you. If I find out that's wrong, I'm going to be very upset, but I'm told that I can't take it with me.

So, you leave your material concerns behind and that includes whether or not you made the right Social Security claiming decision. However, if you're married, think about your spouse, because the spousal benefit is also determined as survivor benefit based on when you delay. The more money you have from delaying claiming, the better off your spouse will be if they're going to get a benefit on your record or a survivor benefit. So, don't just think about yourself, think about your spouse. That's also important.

But again, for people who are worried about what’s called the “hit the bus strategy”, they delay claiming Social Security. They finally get hit by the bus the next day, or they die and never get anything. The name of the program is the Old Age Survivors Insurance Program. This is an insurance program, and it is the one insurance program where you get benefited by a payout for being successful and living longer. Your house insurance, your car insurance, everything else. Auto, home, flood, it's a bad event. If you live longer, it's a good event. So you are rewarded for having a successful life and doing the right thing.

But think about it as insurance. You're trying to make sure you maximize your insurance value. And you do that by delaying claiming if you can afford to do so. Because it helps you, your spouse, and it makes sure you have, again, Social Security as an annuity. And it's an inflation protected annuity that lasts the rest of your life. Nowhere else can you get that kind of guarantee, so you're better off delaying if you can afford to.

Ric Edelman: You have another statistic in your paper that kind of shocked me. You said most middle-income retirees, that's my phrase, not yours, roughly middle class, most of them only get 44% percent of their pre-retirement pay from Social Security. So talk about that.

Jason Fichtner: This is where it comes again to the three-legged stool. I don't think what a lot of people realize about the role of Social Security is that it's a progressive formula. So, for people who are basically lower lifetime earners, they get a higher replacement rate for Social Security, maybe up to 70%, 80%.

If you're a higher income earner for most of your life, you get a lower replacement rate, 30% to 40%. The average American gets, again, to your point, about a 40% replacement rate. As we know from talking to financial advisors, they suggest you have between 70% and 80% replacement retirement.

Ric Edelman: And I argue 100%.

Jason Fichtner: So let's go with that. The old three-legged stool model assumed you were going to get 1/3 from Social Security, 1/3 from your pension, and 1/3 from savings. That's through your income sources. Now people aren't necessarily saving on their own.

The DB system is now DC (defined contribution), so you lose that protected income. And for most people now, they just get protected income from Social Security, and that's about 40%. So you're short. So, what financial advisors should do is start talking about those defined contribution plan assets and making sure we can convert some of that or create an income stream.

That then adds an additional 30% or 40% on. So you get your 70% to 80% or to your scenario hopefully 100%, and you got to do more from your defined contribution plan. But that's why you need to rethink this. 'Cause social security, most people tend to rely on it. They don't realize it's not gonna be everything they think it's gonna be or replace 100% of their income.

Ric Edelman: So, a lot of folks would look at their parents and grandparents at their financial security and they did enjoy that three-legged stool. They did have the gold watch and the pension. They had Social Security, they had home equity, and they had a lot of savings, and they were fine, but part of the reason they were fine is that they also didn't live very long. They were dead in their 60s or early 70s.

We're in a totally different scenario, because not only are two of those three legs of the stool weak or non-existent, longevity is going to compound the challenge that much more so. Because we're not going to die in our 70s. We're going to live into our 90s or beyond. So, it creates a very big challenge and it raises the question therefore, what policy changes do we need to this entire retirement framework, that's going to be relevant for the future retirees for the folks not in their 60s, but the folks in their 30s and 40s?

Jason Fichtner: I'm glad you mentioned longevity, Ric, because according to Social Security, the statistics they put out, about one out of every three 65 year-olds today will live at least until age 90 and one out of seven will live to age 95. Those numbers are just getting better for the younger generation who has better access to health care better foods, safety features in our cars.

Ric Edelman: Not to mention the medical innovation and technological development thanks to AI and other technologies that are going to revolutionize health care.

Jason Fichtner: Yep, and that's another reason why I advocate for people delaying Social Security claiming as late as possible to 70 because they're going to need that higher income when they get to a higher age in the 80s and 90s when they might have more health care expenses. So, it makes sense from that.

To your point about policy, what I think Congress needs to do and policymakers, is again start thinking holistically about retirement and that three-legged stool. So one, we need to make sure Social Security is solvent. I'm not advocating what should be benefit changes, tax changes, a mix of two, but it needs to be solvent so that people know it'll be there for them and what they will get when they hit retirement so it's got to be solvent.

We have to make sure that people have access to a defined contribution plan and then they participate when they have access. Those are policy changes. And we should do something to make it easier to help people convert some of their assets into protected income and retirement, whether through an annuity or a bridge annuity that helps defer and delay claiming Social Security. Something that helps them get the additional income they need, and we can do tax breaks for that.

The third thing I would say is, and this is a little more tricky, because you mentioned the house. So, my grandparents were depression era babies. They paid cash for everything but the house. They had a mortgage for the house. They paid cash for cars and travel. What we are seeing now over time is each successive generation is taking on more debt. Now you could argue they're getting more assets so their debt-to-income ratio or assets-to-debt is better, but we're seeing more and more people now retire without paying off their house first.

Most people paid off their house and then retired. And I think we need to start changing that framework and not look at the house as a piggy bank, but think about it as part of the assets you're going to have in retirement that might pay for long-term care. So don't use it to buy a boat for God's sakes. But think about it as part of that asset base that you might need later on in life to take care of long-term care. And then what can Congress do from the policy side. You've done a lot of work, Ric on helping get, Secure 1.0 and Secure 2.0 across the line. What do we need like Secure 3.0 that can remove barriers or help with people converting some of their assets and their home equity into income they could use in retirement.

Ric Edelman: All of that is incredibly helpful information. And one final question for you, Jason. Talk to my advisors who are listening to this right now, we have an awful lot of advisors tuning into this podcast. What do you want them to be doing and saying to their clients?

Jason Fichtner: So, a few things. One is when speaking to the clients themselves, make sure you're talking about a spending plan in retirement. How to get income as the outcome of retirement and think holistically about their assets. Think about protection as an asset class, think about income as an asset class. It's not just your equities and your bonds, but think about insurance and Social Security and how that all fits into a portfolio that people could use as income in retirement. And then the risks that are associated, they're trying to help minimize risk in retirement.

I would also speak directly to the advisors. So, I've talked to some advisors who, to your point, Ric, advocate for taking benefits at 62 from Social Security. And the advisors do that in some ways, ‘cause they want to leave more assets under management for them to manage and make some income off.

Ric Edelman: Oh my.

Jason Fichtner: What I would say is that is a short-sighted piece of advice, not for the long term.

Ric Edelman: Severe conflict of interest that is entirely self-motivated is not in the client's best interest. And if you're a client, you have an advisor telling you overtly, unless you've got  cancer and your doctor told you you're dead in six months, I would find a new advisor.

Jason Fichtner: So, yes, and I also have some research to back up why it's better to have people defer claiming Social Security. And even if you take some money out of the assets under management to do a bridge strategy to defer claiming, what we have found is that the research just creates what we call a license to spend.

So Ric, you and I have a job, we get income. That income from our job is basically our budget. Economists call it a budget constraint. Out of that income, we spend and we save some, but we spend up to that. We found that people in retirement who have an income, Social Security, maybe a pension or protected income on top of Social Security, also have a budget constraint. And it becomes a license to spend. And they spend up to that.

And then the rest of the assets, they leave for the advisor to manage. And what we found is two things. One, that money stays there and individual investors are less likely to be concerned about market fluctuations. They don't want to sell the bottom because they've got enough income coming in to control their spending, and they don't have to worry about it.

So, the assets stay there and don't turn over. And we find that at the point of death, we look back at like the Holistic Retirement Strategy. We find that people who did this strategy had more assets at death than if they hadn't done it. So, at the end of the time, there's more money for bequest for a spouse and there's more money for the manager to manage. So everyone comes out better thinking about the long term than the short term.

Ric Edelman: There you are. And that is the pure definition of financial planning, focusing on the long term. That's Jason Fichtner, Ph.D., chief economist of the Bipartisan Policy Center. Jason, always a pleasure to have you on the podcast. Thanks again for joining us.

Jason Fichtner: Thank you, my friend. Good to see you.

Ric Edelman: Hey, I don't know if you missed it, but a couple of days ago, we hosted a webinar on how to generate income in the world of declining interest rates. If you miss the webinar, there's an opportunity for you to watch the replay for free. The link is in the show notes in this webinar, I had a conversation with Rene Reyna and John Burrello from Invesco, and we talked about innovative ways that you can deal with generating investment income while interest rates are declining that not only give you the income you need on a monthly basis, but the opportunity for growth with lower volatility. I invite you to check this out. Like I said, the link is in the show notes.

If you like what you're hearing, be sure to follow and subscribe to the show, wherever you get your podcasts, Apple, Spotify, YouTube, and remember leave a review on Apple podcasts. I read them all. Never miss an episode of The Truth About Your Future. Follow and subscribe on your favorite podcast app.  

I'll see you tomorrow.

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Links from today’s show:  

Ric Edelman College of Communication and Creative Arts: https://ccca.rowan.edu/

ProtectedIncome.org Study on Retirement and Protected Income:  https://www.protectedincome.org/news/information-gap-advisors-consumers-prip-chapter-3-2024/

Protected Income website: https://www.protectedincome.org/

11/13 Webinar Replay - An Innovative Way to Generate Income in a World of Declining Rates: https://www.thetayf.com/pages/november-13-2024-an-innovative-way-to-generate-income

10/9 Webinar Replay- Crypto for RIAs: Yield, Staking, Lending and Custody. What’s beyond the ETFs? https://dacfp.com/events/crypto-for-rias-yield-staking-lending-and-custody-whats-beyond-the-etfs/

Certified in Blockchain and Digital Assets including Crypto Taxation Course/Webinar: https://dacfp.com/certification/

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