Dem’s Want to do WHAT to Social Security?!

Dear Rich Lifer,

Yesterday, I started telling you what Bernie Sanders wants to do with Social Security and I left you with a cliffhanger – namely, a promise to talk more about Sanders’ assertion that the program “isn’t broke” … as well as proposals put forth by other Democratic candidates.

So let’s pick up with Sanders’ statement that “Social Security’s finances are strong.”

As he explains it:

“Despite what you may have heard from those who want to cut back on Social Security, let’s be clear: Social Security is not ‘going broke.’ Social Security has a $2.9 trillion surplus and can pay every benefit owed to every eligible American for the next 16 years.”  

This is misleading at best.

Social Security by the Numbers 

Yes, Social Security has $2.9 trillion in its trust fund. And that money, along with additional money being collected through ongoing taxes, is enough to pay promised benefits for the next 16 years.

But there are a few things Sanders fails to mention:

First off, what is presented as fact is actually a projection from the program’s Trustees and the projections have typically been getting worse over the last decade.

Second, Social Security is entering a (likely permanent) state of underfunding … meaning it is collecting less than it pays out on an annual basis.

This is hardly a situation that I would describe as “strong finances.”

But don’t take my word for it. Here’s what the Trustees say in their latest annual report:

Both Social Security and Medicare face long-term financing shortfalls under currently scheduled benefits and financing. Lawmakers have a broad continuum of policy options that would close or reduce the long-term financing shortfall of both programs. The Trustees recommend that lawmakers take action sooner rather than later to address these shortfalls, so that a broader range of solutions can be considered and more time will be available to phase in changes while giving the public adequate time to prepare.

 They go on to explain:

“Social Security’s total cost is projected to exceed its total income (including interest) in 2020 for the first time since 1982, and to remain higher throughout the remainder of the projection period. Social Security’s cost will be financed with a combination of non-interest income, interest income, and net redemptions of trust fund asset reserves from the General Fund of the Treasury until 2035 when the OASDI reserves will become depleted. Thereafter, scheduled tax income is projected to be sufficient to pay about three-quarters of scheduled benefits through the end of the projection period in 2093. The ratio of reserves to one year’s projected cost (the combined trust fund ratio) peaked in 2008, generally declined through 2018, and is expected to decline steadily until the trust fund reserves are depleted in 2035.

What Does that ACTUALLY Mean? 

In plain English: Social Security will burn through the money it has in the bank to cover ongoing cash flow shortfalls. Then, perhaps 15 years from now, it will only be able to pay about 75% of what you are being promised on your current statements.

Take this general concept and apply it to a company that is burning through its cash on hand at a fast rate and losing money every single year …

Or to a family that is using up all its savings to continue living beyond its current annual income…

And then tell me that Social Security isn’t “going broke” as regular people commonly understand that phrase.  

Yet Sanders isn’t simply proposing a fix to shore up the program. He wants to expand it further.

To do so he would begin applying the 12.4% payroll tax to all income above $250,000.

That would leave a donut hole for income between roughly $130,000 and $250,000.

Elizabeth Warren has a similar, though more aggressive, plan. Her website says:

“We should be increasing Social Security benefits and asking the richest Americans to contribute their fair share to the program. For years, I’ve helped lead the fight in Congress to expand Social Security. And today I’m announcing a plan to provide the biggest and most progressive increase in Social Security benefits in nearly half a century.”

Her plan includes immediately increasing S.S. benefits by $200 a month for every current and future Social Security beneficiary and further expanding benefits for various groups of Americans – “lower-income families, women, people with disabilities, public-sector workers, and people of color.”

 

Funding would come from an 14.8% payroll tax applied to individual wages above $250,000. The same rate would also apply to net investment income for individuals making more than $250,000 and families making more than $400,000. As with the regular 12.4% payroll tax that currently applies to a capped amount of income, the burden would be split between employers and employees.

 

In addition to paying for her program expansion, Warren says this new money would also extend Social Security’s solvency out another 20 years.

 

That’s interesting, because you’ll notice that neither Sanders nor Warren are putting forth a plan that makes Social Security permanently solvent.

 

Now, what about Pete Buttigieg?

 

And perhaps more pointedly, what about the accusation that Joe Biden is the one major Democratic candidate with a history of supporting Social Security?

 

We’ll cover that in a third and final installment tomorrow!

To a richer life,

Nilus Mattive

Nilus Mattive

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Nilus Mattive

Nilus is the editor for the daily e-letter The Rich Life Roadmap and a Paradigm Press analyst.

Nilus began his professional career at Jono Steinberg’s Individual Investor Group, where he published his original research through a regular investment column. Later, he worked for a private equity business and spent five years editing Standard and Poor’s...

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