Is Social Security Going Broke?

[00:00:08] Hey, welcome to another edition of Retirement Made Simple, a podcast dedicated to helping

[00:00:13] a million people retire without worry. I'm your host, Kevin Lum.

[00:00:21] A client forwarded me a rather alarming headline this week from the Washington Post. The headline

[00:00:25] read, the Social Security and Medicare financials look grim as overall debt piles up. Now,

[00:00:31] the article was talking about a report from the Social Security and Medicare Board of

[00:00:36] which said that, like all the reports before it, that Social Security and parts of Medicare

[00:00:42] are running out of money at an alarming rate. Like the reports before it warned that automatic

[00:00:46] benefit cuts are coming in less than 10 years because the program is paying out more money

[00:00:52] than it's taking in. Now, it's great for clicks. The media loves stories like

[00:00:55] this anytime they can talk about something scary or grim. But in this situation, Congress

[00:00:59] doesn't act. For many people, it could be dire, a minimum of 20% cuts in just

[00:01:04] But of course, as always, the headlines don't tell us the whole story. So today I want

[00:01:07] to talk about four giant myths around this future of Social Security and give you some

[00:01:12] insights into how I think the government will try to fix this giant hole, including

[00:01:17] one stealth way that could impact many of you watching this. My goal for this

[00:01:21] video is that by the end, you'll know more about the Social Security trust fund

[00:01:25] shortfall than 99% of Americans and probably a lot of members of Congress.

[00:01:30] But first, my name is Kevin Lum. I'm a certified financial planner and this channel

[00:01:33] is dedicated to helping a million people retire without worry. Now before I dive into

[00:01:38] the myths, I want to give you a bit of background. If you don't care, if you

[00:01:42] don't want the background, just skip past this section. I particularly want to

[00:01:45] talk about how Social Security is funded because I think it's going to help us

[00:01:48] understand everything else just a bit better. Funding for Social Security and Medicare

[00:01:53] come from a dedicated payroll tax paid by you and paid by your employer. So you'll

[00:01:59] each kick in 6.2% of gross wages up to a certain threshold. Currently, as of 2024,

[00:02:05] when I recorded this, it's 168,600 per year. So any wages exceeding that

[00:02:11] amount are exempt from Social Security taxation. In addition, Medicare also

[00:02:15] collects an additional 1.5% of gross wages from you and from your employer,

[00:02:21] bringing the amount that each you and your employer pay to 7.65% of your

[00:02:26] gross wages. These contributions are mandated by something called the Federal

[00:02:30] Insurance Contribution Act, which shows up as FICA. Now self-employed

[00:02:35] individuals, they know exactly how much this total amount is because they

[00:02:39] have to pay it all. There's no employer to split it with and that

[00:02:42] means for the first 168,600 that you earn if you work for yourself,

[00:02:47] 15.3% of what you earn goes to pay for Social Security and Medicare. So

[00:02:52] far so good. You know this, right? You've seen this on your paycheck a

[00:02:55] hundred times. The money you pay goes into a trust fund, which then gets

[00:03:01] invested and it's where future benefits are paid from. Except we have

[00:03:05] a problem. We're paying out more money than we're taking in and that

[00:03:08] problem is going to get worse over the next couple of decades as we

[00:03:11] have more and more people entering retirement and we have less people

[00:03:15] entering the workforce. The money in the trust fund is quickly eroding

[00:03:19] and the trustees of Social Security and Medicare said last week that

[00:03:22] their forecast for the Social Security Trust Fund was mostly the

[00:03:26] same as the year before. It's going to run out of money in 2033, at

[00:03:30] which point retirees will see a benefit cut of somewhere around

[00:03:34] 20%. Now the news of Social Security going away or benefits being

[00:03:38] cut rattles a lot of people and for good reasons, a huge percent

[00:03:41] of Americans rely on the money from their Social Security check

[00:03:44] to make ends meet. But the problem is there is a lot of

[00:03:48] misinformation around these cuts, around what's going on. So today

[00:03:52] I want to spend some time looking at the misinformation because my

[00:03:55] fear is that people are making decisions about their future based

[00:03:58] on faulty information. And I want to also talk about how I think

[00:04:02] the government may try to fix this problem and it could impact

[00:04:05] you as well. So the first myth is that Social Security is going

[00:04:09] to be bankrupt or run out of money. As I said, the program

[00:04:13] is funded by payroll taxes. As long as people continue paying

[00:04:17] into the system, as long as money is coming in, they're going

[00:04:20] to be able to pay for part of the benefits. Last year, 183 million

[00:04:24] people, according to the report, had income that was subject

[00:04:26] to Social Security tax. So there is no risk, at least within

[00:04:30] the next 100 years of Social Security going away. The problem

[00:04:34] is, is that we're going to spend more money than we're

[00:04:37] taking in. Now we have a trust fund, these reserves that

[00:04:40] help make up that difference, but that trust fund is what's

[00:04:43] going to become depleted. So money is still coming in to

[00:04:47] cover a large portion of Social Security, but just not enough

[00:04:50] to cover the full amount. So the old age and survivors

[00:04:53] insurance program, OASI, which is what most of you think

[00:04:56] of when you think of Social Security, will be able to pay

[00:04:58] retirement and survivor benefits, 100% of those

[00:05:02] benefits until 2033. Now if Congress fails to act in 2033,

[00:05:07] there's still going to be enough to cover around

[00:05:10] percent of the scheduled benefits for years to come. So

[00:05:14] there's going to be a benefit. The question is, are they going

[00:05:17] to cut the benefit? So what you need to understand is that

[00:05:20] Social Security is not going bankrupt, it's not going away,

[00:05:24] it's still going to be around. The question is, will it

[00:05:26] be around the same amount that you built your retirement

[00:05:29] projections on, particularly if you're in retirement now,

[00:05:31] if you're in retirement now, and let's say you have $5,000

[00:05:34] in Social Security income coming in, if you lose 20% of

[00:05:37] that income, now you go from 5000 a month to 4000 a

[00:05:40] month. And if you're just making ends meet, that can be

[00:05:42] catastrophic. So the first myth is that Social Security is

[00:05:45] going bankrupt. That's not true, about 80% of the benefit

[00:05:48] will be able to be paid into the far foreseeable future.

[00:05:51] But the problem is, is that the trust fund which allows

[00:05:54] them to make up any shortfalls that he is running

[00:05:56] out of money and can go bankrupt by 2033. The next

[00:06:00] myth, and this is probably the most problematic one in my

[00:06:02] opinion, is this idea that you need to claim Social

[00:06:05] Security early because it's going to run out of money,

[00:06:07] and you just need to collect every penny you possibly can

[00:06:09] before it runs out of money. There's been a long running

[00:06:12] debate about when you should claim Social Security. Just

[00:06:14] look on YouTube, right? People swear up and down, you

[00:06:17] should do it early, take it at age 62. And other people

[00:06:19] say at age 67 or your full retirement age. Other people

[00:06:22] say delay to age 70. And there are a number of things

[00:06:25] you need to consider in that decision. What is your

[00:06:27] health like? Does it make sense for your spouse to

[00:06:30] delay so they have a higher survivor benefit? Do you

[00:06:32] need the money? Do you have other income streams coming

[00:06:35] in? Like I said, there are a lot of variables that you

[00:06:37] should consider, but I would not allow panic about

[00:06:39] the future stability of Social Security. Force you to

[00:06:42] make a decision that isn't right for you. If benefits

[00:06:45] are cut, you're going to want a higher payout, not a

[00:06:48] lower payout. So that's the second myth. The third

[00:06:51] myth is that the federal government has rated the

[00:06:53] Social Security trust funds. Now this myth is

[00:06:56] completely untrue, but I understand why people

[00:07:00] think it's true. So let me give you a little bit

[00:07:01] of background. Think about the Social Security trust

[00:07:04] fund like your savings account at your local bank,

[00:07:07] and the bank repays you with interest when you make

[00:07:10] a withdrawal. Now, where do they get that interest

[00:07:11] from? You put money in the bank, the bank takes

[00:07:14] that money, and then they put it to work,

[00:07:16] lending it out. They earn interest, auto loans and

[00:07:19] home loans, and then you get a little bit of

[00:07:21] interest for the money that's sitting in your

[00:07:22] account. By law, every penny invested into the

[00:07:25] Social Security trust fund is invested in

[00:07:28] interest bearing securities, which are US

[00:07:30] government treasuries. So in the same way that

[00:07:32] you might invest your money in government

[00:07:33] treasuries, the Social Security trust fund does

[00:07:36] the same thing. So it's true that the money

[00:07:38] has been spent for other government needs, but

[00:07:41] that money is simply being loaned and is going

[00:07:43] to be paid back with interest like any other

[00:07:45] government treasuries. This interest then helps

[00:07:48] the Social Security administration be able to

[00:07:50] pay future benefits. The securities held by the

[00:07:53] trust have always been honored as have all

[00:07:56] other US government treasuries. But like I

[00:07:58] said, it's easy to understand how people get

[00:08:01] confused because it looks like the money from

[00:08:03] the trust fund is getting spent for other

[00:08:05] things. It's simply being loaned in the same

[00:08:08] way a bank loans out your money. The fourth

[00:08:10] myth, and I almost didn't include this one

[00:08:12] because at the end of the day it's really

[00:08:13] not that relevant, but there's this myth

[00:08:15] going around is that Congress doesn't fix

[00:08:17] the problem because Congress doesn't pay

[00:08:19] into Social Security. Now there are a lot

[00:08:21] of reasons why Congress doesn't fix the

[00:08:22] problem. They're a very broken institution

[00:08:25] with a lot of gridlock. But it's not

[00:08:28] because lawmakers do not pay into Social

[00:08:31] Security because they do. As part of the

[00:08:34] amendment to the Social Security Act in

[00:08:36] 1983, which by the way was the last major

[00:08:38] reform. I was three years of age. The last

[00:08:41] time there was a major reform of Social

[00:08:42] Security was 40 years ago, which is just

[00:08:45] bonkers to think about. But at that

[00:08:47] time all the members of Congress begin

[00:08:49] participating in the Social Security

[00:08:51] administration as of January 1st of 1984

[00:08:54] regardless of when they were first

[00:08:56] elected to Congress. So it is true. At

[00:08:58] one point Congress did not pay into

[00:08:59] Social Security, but now they do. That is

[00:09:01] not why they haven't fixed our system. As

[00:09:03] I said, they haven't fixed it because

[00:09:05] they're incredibly dysfunctional. So

[00:09:07] this all brings me to the most

[00:09:09] important point. How is this problem

[00:09:11] going to be fixed and is it going to

[00:09:13] impact you? If you were retired today

[00:09:16] or you are nearing retirement, chances

[00:09:18] of you having your benefit cut in my

[00:09:20] opinion are next to zero. Now why can

[00:09:23] I make such a bold and outlandish

[00:09:25] claim? Simple. You vote. That's about

[00:09:29] as simple as I can make it. People in

[00:09:31] or nearing retirement vote at much

[00:09:34] higher percentages than anyone else. If

[00:09:36] you want to lose an election, cut a

[00:09:38] benefit going to your largest

[00:09:40] constituency and see how that goes. I

[00:09:43] think it is very unlikely that anyone

[00:09:45] nearing retirement or in retirement

[00:09:47] now will have a reduction in benefits.

[00:09:50] So how are they going to fix this

[00:09:51] problem? I think there are a few ways

[00:09:53] they may try to fix the problem.

[00:09:54] First, they could increase the payroll

[00:09:57] taxes. So as you know, we talked

[00:09:58] about it being a percentage of your

[00:10:00] wages or your gross wages are paid

[00:10:02] into the Social Security Trust Fund.

[00:10:03] They could increase the payroll tax so

[00:10:06] more of your income goes into the

[00:10:08] trust fund. The second thing they

[00:10:10] could do is they could raise the cap

[00:10:12] on taxable earnings that are subject

[00:10:13] to Social Security, which as I said

[00:10:15] is 168,600 as of 2024. Or they

[00:10:19] could do away with it altogether. So

[00:10:20] they could raise the cap or they

[00:10:21] could just get rid of the cap

[00:10:23] altogether. And that means that

[00:10:24] higher earners would contribute a lot

[00:10:26] more to the Social Security Trust

[00:10:28] Fund. The next thing they may do is

[00:10:30] they may continue to raise the

[00:10:32] retirement age so people would receive

[00:10:33] benefits for fewer years, reducing

[00:10:36] the total amount that's paid out

[00:10:38] next. And this is what some other

[00:10:39] countries have done is they could

[00:10:41] increase legal immigration,

[00:10:43] increasing legal immigration,

[00:10:45] boost the number of workers paying

[00:10:47] into the Social Security Trust

[00:10:49] Fund, therefore helping to balance

[00:10:51] the ratio of workers to retirees.

[00:10:53] Now, of course, eventually that's

[00:10:54] going to catch up to you because

[00:10:55] all the people you brought into the

[00:10:56] system and who've been paying

[00:10:58] the Social Security Trust Fund,

[00:10:59] they're going to eventually want

[00:11:00] their benefits. And if that ratio

[00:11:02] gets out of whack again, you're

[00:11:03] just going to have an even

[00:11:04] larger problem. The next way they

[00:11:06] could increase the amount of

[00:11:07] money going into the trust fund

[00:11:08] is they could just tax more of

[00:11:10] your Social Security benefit. If

[00:11:12] you've been watching this channel,

[00:11:13] you know that in 2024, the

[00:11:15] highest number of people ever

[00:11:16] had their Social Security

[00:11:18] benefits subject to tax because

[00:11:20] as your benefit amount goes up,

[00:11:21] your benefit amount is tied to

[00:11:23] COLA because there's a cost of

[00:11:24] living adjustment. But the

[00:11:25] threshold for how your income is

[00:11:27] taxed hasn't been adjusted in

[00:11:29] years. And so more and more

[00:11:30] people are having their Social

[00:11:32] Security benefit be taxed, and

[00:11:33] that tax then goes back into

[00:11:35] the trust fund. So a stealth way

[00:11:37] of increasing funding without

[00:11:39] cutting benefits would simply

[00:11:40] be to make you pay more of

[00:11:42] your Social Security benefit

[00:11:44] and tax. I think there's a

[00:11:45] real possibility that more and

[00:11:47] more people are going to see

[00:11:48] more of their benefits subject

[00:11:50] to tax rather than a reduction

[00:11:52] in benefits. Now I'm going to

[00:11:53] stop there. Hopefully you now

[00:11:55] have a better understanding about

[00:11:57] the future of Social Security.

[00:11:59] And there are a lot of things

[00:12:00] that are uncertain, but if you

[00:12:02] hear nothing else, don't allow

[00:12:04] fear to drive your decisions

[00:12:06] around Social Security.

[00:12:08] Hey, thanks for listening.

[00:12:09] If you do me a favor and

[00:12:11] leave a review on whatever

[00:12:12] podcast platform you're

[00:12:14] listening on, whether that be

[00:12:15] Spotify or Apple Podcast,

[00:12:17] that helps other people be

[00:12:19] able to find this podcast.

[00:12:21] And if you're looking for a

[00:12:22] financial advisor, I would be

[00:12:23] honored if you would consider

[00:12:25] our firm. You can go to

[00:12:26] foundryfinancial.org.

[00:12:28] That's foundryfinancial.org

[00:12:30] to find out more information

[00:12:31] about what that would look

[00:12:33] like. And also you can find

[00:12:34] me on YouTube. Just search

[00:12:36] Kevin Wong. Thanks again for

[00:12:37] listening.