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The “Skinny” on Social Security and Payroll Taxes


By Heidi Huiskamp, Founder and CEO of Huiskamp Collins Investments, LLC

Benjamin Franklin was famously quoted as saying that death and taxes are the only things in this life that are certain. If you are currently retired or nearing retirement, the big question is whether taxes collected, including payroll taxes of current and future employees, are going to yield enough to pay your social security benefits until you die. I have some pretty sobering news for you. When President Roosevelt signed the Social Security Act into law on August 14, 1935 it looked a lot different than what we’re used to today in 2021. At that time, a retired worker could not collect any benefits until age 65. Guess what the life expectancy was in 1935? You guessed it: 65 years old. Additionally, according to the Social Security Administration’s website, in 1935 there were 42 people paying payroll taxes into the benefits system for a single beneficiary taking money out. The benefits “kitty” was flush with cash and the future looked bright. Fast forward to 2020, the latest statistics available on the website, and it’s reported that for every recipient, there are only 2.7 workers paying into the system. Yep, you read that right: 2.7 workers funding the monthly retirement checks of each of 69.8 million people. And let’s not forget that us “Boomers” are retiring at a rate of 10,000 additional people every day with the expectation that a big chunk of our retirement expenses are going to be funded by a monthly check. COVID has only exacerbated the rate of folks deciding that they are DONE and ready to start their “Golden Years.” Every week, I have new clients come into my office who are claiming social security benefits at the age of 62. Over the almost 20 years that I’ve been a licensed financial advisor, the conversation has moved away from strategizing methodically at what age clients should file to optimize lifetime benefits based on a whole host of factors to retirees filing the second they become eligible. For a professional like me who has watched life expectancies rise and people enter retirement poorly prepared with little to no savings and loads of debt, the trend is worrisome at best. The latest numbers from the World Health Organization (WHO) report that U.S. citizens in 2021, on average, will live to be 79 years old. With medical advances taking place every day, it won’t be unusual very soon for people to easily live to be 90 or 100 years old. In 1935, then, hardly anyone collected social security benefits and now retirees expect to be supported for 17 years and, before too long, many more than that.

It’s not good press and nobody wants to talk about it, but the expectations and facts that are playing out are not sustainable. I know I’ll take some heat here just as I have from my clients, but I’m here to give you the bare facts. Clients have become very upset with me when I tell them that their social security benefit checks won’t be able to be maintained at what was “promised” them. Voices get raised and there is a great deal of indignation that I should suggest such a thing because that is “their money.” The best I can tell, the average person thinks there is something akin to a bank account with their name on it at some big government “bank” and that all the money they watched over the years being subtracted from their wages grew and grew and grew and is now coming back to them over time as their rightful due. They’ll even bring in old statements from the Social Security Administration that showed the monthly benefits they would receive at different retirement ages. “Here it is in black and white,” they say. “Look right here! It has to be true!” I got those statements too. I know what they say and I know what has been “promised” you. The truth is a little different. There are no individual accounts somewhere with your name on it. All those payroll taxes got funneled together into one big pot to pay retirees on a “pay as you go” basis. Over time, politicians found out that a great way to get elected or re-elected was to change the original terms of the Social Security Act and to increase benefits and start offering them to more people at an ever younger age. What rational person didn’t want more money at a younger age? “Of course I’ll vote for you!” Was it popular? Absolutely. Was it responsible? Absolutely not. Fewer and fewer workers are funding the outlays and more and more retirees are living much longer lives than President Roosevelt and Congress in 1935 ever envisioned. If you collect social security benefits beginning at age 62 and receive a monthly check for 17 years before you die at age 79, I promise you that you will have received MUCH MORE than what you ever paid in along with the growth of those payroll taxes. I’m sorry to be the one to burst your bubble, but there it is. The Social Security Administration estimates that by 2039, the number of current workers supporting and making possible the monthly checks to all those seniors will have declined to a ratio of 2.2 to 1. The expectation is that by 2034 all reserves will be depleted and payroll taxes of current workers will only be able to finance 78 percent of benefit checks. That’s just the facts. This is not about blaming workers or retirees or the government. This is not a political rant. This is just a big math problem and the equation doesn’t balance.

What should you do? Many people will bury their heads in the sand and pretend all is rosy and come up woefully unprepared. I’ve had other clients say that the government will “have to” help them out if their social security benefits get cut and they run short of money to pay retirement expenses. That’s not the way the real world works. If this article speaks to you, please take a good hard look at your budget, your spending and your debts. Please, please take a proactive approach and ready yourself for a time when you may not receive the full benefit you were expecting. Next month, I’ll be writing about the future of income taxes in light of the increasing burdens of paying for Social Security and Medicare.

If you’d like to have a common sense conversation about social security, budgeting, debt or investing for retirement, I’d be honored to help. Please email me at heidi@hhcinvestments.net or call me at 563-949-4705.

Securities offered through J.W. Cole Financial, Inc (JWC). Member FINRA/SIPC. Advisory services offered through J.W. Cole Advisors, Inc (JWCA)>  Huiskamp Collins Investments, LLC and JWC/JWCA are unaffiliated entities.