The Worst Way to “Save” Social Security
Peter Reagan

It’s a well-known fact by now that the Social Security Trust Fund is in big trouble.

It’s also a fact that without a reasonable solution by 2034, retirees will face a serious reduction (20-25%) to their monthly Social Security benefit. The last time the trust fund was depleted like this was back in 1982.

The latest trustee report claims the following for people considering retirement and claiming benefits (called Old Age and Survivors Insurance):

The Old-Age and Survivors Insurance (OASI) Trust Fund will be able to pay 100 percent of total scheduled benefits until 2033, one year earlier than reported last year. At that time, the fund’s reserves will become depleted and continuing program income will be sufficient to pay 77 percent of scheduled benefits.

In simple terms, that means a 23% reduction in benefit payments after 2033. (If things don’t get even worse in the meantime.)

In the past, the more common ways to address deficits in the Social Security trust fund were simple:

• Raise taxes
• Cut expenses by raising the full-benefit retirement age (currently 70)

But right now, no taxpayer would be very happy if they had to pay more to receive benefits they’re already entitled to at retirement. Especially once you consider the fact that taxes they’ve paid into the Social Security program have already been spent by the time they start collecting benefits.

The closer you are to 70 years old, the less you want the age limit to go even higher.

Any solution which eventually gets implemented would also have to be both politically and financially acceptable.

No one wants to pay more for Social Security, and nobody wants to get less when their retirement time comes.

So where does that leave us?

Redistributing Social Security benefits

One solution to this conundrum was recently proposed by economist Andrew Biggs, a senior fellow at the American Enterprise Institute, together with economist Alicia Munnell, director of the Center for Retirement Research.

Unfortunately, their idea leaves much to be desired, and here’s why…

By rolling back the tax incentives provided through defined contribution retirement plans, the money saved could be used to help fix a portion of Social Security’s funding gap, the researchers contend.

That would provide immediate funding to the program that provides the nation’s retirement, disability and family benefits, and give lawmakers more time to consider other changes such as tax increases or benefit adjustments that would have to be more gradually phased in, according to Biggs.

“A tax preference that doesn’t affect behavior isn’t doing what you want it to do,” Biggs said.

“Rolling back tax incentives” means raising taxes, folks.

Furthermore, it funds current shortfalls by taking money away from other retirement savers.

This is not a solution! 

But it gets even more interesting…

In a post written by Munnell, the specific ways that their solution would change how people choose to save for their retirement using a direct contribution plan (like a 401k) were addressed.

Here is a sample of those, as outlined in the post:

…simply include both employee and employer contributions in the employee’s earnings and tax the returns on contributions like the returns on other savings.

An alternative to eliminating the subsidy totally is to limit the amount of money that goes into a plan, and thereby the share of the subsidy going to high earners.

Numerous other options exist for cutting back on the current level of tax expenditures in DC plans, such as retaining the deduction (or replacing it with a credit) but then taxing the earnings on plan assets annually (the so-called inside buildup) and/or moving the age for taking the RMD back from the scheduled 75 to 70½.  Whatever approach is taken, comparable changes would be required for Roth DCs and for DB plans to avoid a wholesale shift in plan type to retain the tax advantages.

That’s right – this plan effectively punishes “high earners” (an exact number isn’t defined) by raising their taxes.

Aside from the strange suggestion to tax employer 401k returns like any other investment returns via annual tax returns, which is a non-starter for most people, it gets even weirder.

The “share of the subsidy” appears to be the very “tax break” that someone would enjoy by keeping their money in a typical employer 401k retirement vehicle. Munnell seems to suggest placing limits on those subsidies, then taking the difference to fund Social Security’s deficit.

In other words, “robbing Peter to pay Paul,” as the saying goes.

But the bigger problem with Munnell’s suggestion is it recommends the same changes for Roth IRAs, along with other plan types, in order to keep people from moving their money to those plans for the tax advantages.

Strangely enough, their proposal looks as though it ends up taxing funds that people are setting aside, so they can enjoy tax breaks.All in order to help fund a Social Security program which already pays benefits from collected payroll taxes in the first place.

It doesn’t make much sense.

Needless to say, Munnell and Biggs’ proposal has faced some serious scrutiny. The easiest criticism to understand appears to boil down to a simple idea…

“Raiding private savings to prop up Social Security”

Fellows at The Cato Institute issued the sharpest criticism of this proposal, appropriately titled “The Case against Raiding Private Savings to Prop Up Social Security.” The main summary is as follows:

The overwhelming evidence is that tax – advantaged accounts significantly increase private savings. Over time, even small increases in private savings can contribute to a larger capital stock, additional labor supply, and a bigger economy. The private benefits to additional savings, combined with the broader economic benefits, outweigh any temporary government losses, even if the lower revenue does not induce a one – for – one increase in private savings.

The balance of the evidence suggests that raiding Americans’ private retirement savings to prop up Social Security would significantly reduce private retirement savings and slow capital accumulation necessary to sustain a growing economy.

I sincerely hope your personal retirement planning is in better shape than these harebrained redistribution schemes, whether you’re a “high earner” or an everyday working American.

If you’re concerned about the future of Social Security, here’s an alternative to consider…

Don’t count on politicians or professors to save your retirement

Maximizing Social Security benefits is an important part of any retirement plan.

But waiting 10 more years for academics, government officials, and lawmakers to hash out the details could put your retirement in jeopardy (unless you have a crystal ball).

So the lesson here is simple: Don’t rely solely on Social Security benefits to fund your activities during your “golden years.”

That means prudent Americans can consider two other extremely smart ideas:

1. Diversify your savings (properly).
2. Stop trying to predict the future (you never know what it will hold).

That also means the time is right for you to consider one asset that can help you accomplish both, starting right now. That asset is precious metals.

You can get the rest of the story behind dollars, inflation, and diversifying with precious metals like gold and silver in our free information kit.

 

 

Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver.

 

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