This is my biweekly paycheck and
this is my gross pay. It's blocked out because, well, privacy and
here are all the taxes I'm paying. There's the
federal income tax. And because I live in Manhattan, but work
for a company that's based in New Jersey, I pay New Jersey state income
tax, New York state income tax and New York City income tax. Yeah, I know. There's also a Medicare tax. And then right here is something
called the Social Security tax. It's six point two percent of my pay
stub, which is then matched by my employer. The money that I'm paying into
the system now is supposed to come back to me later in retirement. But for a while now, experts and
politicians alike have been warning that the chances of that actually happening aren't
looking so good if, in fact, he continues to withhold his plan to
withhold the tax on Social Security. Social Security will be bankrupt in by 2023
with no way to make up for it. Social Security faces a big mismatch
between the revenues that's scheduled to take in and the benefits that it's
scheduled to pay out currently in in twenty twenty. We're paying more in
benefits than we're receiving in revenue. A Quinnipiac poll shows that
less than half of Americans actually think that Social Security will be able
to pay them a benefit when they retire. More and more young clients
are asking whether or not Social Security is going to
be there for them. And we don't know the
answer to that question. Since 2010, Social Security's cash flow has
been negative, which is just a fancy way of saying that the
agency isn't collecting enough money through taxes to cover what it's paying out. But all wasn't lost. There was still this huge trust
fund behind Social Security, so they started tapping the interest
on that fund. But here's the thing. Starting in 2021,
they'll have to dip into the trust fund itself to cover
those benefit payments. And even that pool of
cash has an expiration date. Trustees of the fund expect that by 2035,
it won't be enough to cover full benefit payments. And thanks to covid-19, that date
may come years sooner than expected, which has some retirees seriously
worried about their future. I don't know what I would do if I
didn't have it or if it's that I really don't know. I could live
off the small pension. I would drain my
savings and investments. Within a couple of years, but experts
speaking to CNBC think that lawmakers will not under any circumstances, let the
system go bust, which begs the question, what went so brutally wrong for
the 85 year old program and will it actually be there when
you're ready to retire? U.s. President Franklin D. Roosevelt signed the Social Security Act
into law halfway through the Great Depression, this Social Security
measure gives at least some protection to 30 millions of our
citizens who will reap direct benefits through unemployment compensation, through old
age pension and through increased services for the protection of
children and the prevention of ill health. Social Security was originally
intended to just do three things provide benefits for
retired, unemployed and disadvantaged Americans over the next 40 years. The program ballooned in 1939. Amendments added child, spouse
and survivor benefits. But the real changes
began in the 1950s. Benefit amounts substantially increased coverage
under the program became close to universal, and a new
disability insurance benefit was offered. In 1965 was the year that Social
Security got into the business of health insurance. Medicare and Medicaid provided
a vital lifeline to health insurance coverage for the country's older
and low income adults and in the 1970s were expanded even further to
include a much larger group of people like individuals of
all ages with disabilities. The last major changes came in 1983,
when benefits and taxes were adjusted to help generate surpluses in the
program and to build up Social Security's substantial trust fund. That's the same fund
that's now at risk. Now, will all these changes to
the system were under way? The nine digit Social Security number
was fast becoming the single most important identification number
in the country. It was originally meant only to
log a worker's earnings over their lifetime in order to
calculate their retirement benefits. But it kept being adopted by more
and more government agencies and private sector companies as the
identification number of choice. The IRS started using it for taxes in
1962, the military in 1969 and later everything from driver's licenses
to credit reporting agencies. Your landlord, utility companies and cell
phone providers started using it to. So for better or worse, these
nine digits have essentially become our national I.D. by default, and now the
number is assigned when you're born and it tracks you till you die. The first monthly Social Security check was
cashed in 1940 for a grand total of about 23 dollars. Fast forward to 2020. And the average retired worker gets
around 1500 dollars a month from Social Security. Nearly nine out of 10
people aged 65 and older receive Social Security benefits. And Gallup research shows that some 57
percent of retirees say it's a major source of income in their
retirement, eclipsing by far the second and third sources such as four one
KS IRAs and other work sponsored pension plans. So do I
depend on Social Security? So without a doubt, C.C. Domínguez has been retired for 10 years
and she tells CNBC that she doesn't know what she'd do
if the payments stopped. As the economy changes, prices going up
and they continue to go up. The money that I had was not stretching
in the same way it used to. And we're talking about gasoline, food,
utilities, just the basics that we have to support ourselves with. Social Security and a fixed income
that matched that increase has been working several part time jobs to make
up for the difference between what Social Security pays her and how much
her bills cost her every month. So how exactly are
those monthly benefits calculated? Well, they're based on your income, the year
you were born and the age you decide to start taking money out,
wondering how the math works. Well, here's a case study. The median salary is about fifty two
thousand dollars will round down to make things easy. If you have
a traditional job making fifty thousand dollars, you pay six point two percent
of your salary or thirty one hundred dollars a year
in Social Security taxes. That number is then
matched by your employer. Those numbers are straightforward. Figuring out how much you'll get back when
you're ready to cash out is a different story. Let's say you'll turn
62 in twenty twenty and your average lifetime salary was fifty
thousand dollars adjusted for inflation. To determine your benefits, Social Security
takes your top 35 earning years adjusted for inflation,
adds them all together. Then divide that number by four hundred
and twenty the number of months and thirty five years that gives you
four thousand one hundred and sixty six dollars. Still with me, that
number is your average indexed monthly earnings or Iame. Simply put, it's your monthly pay
for the last 35 years. But there's still some
math to get through. Your benefits are determined by Ben points
in an equation almost like a tax bracket, but it's used
to give you money instead. The less money you've made, the higher
a percentage of your salary you'll get back. This is designed
to help low wage retirees. So let's run your
monthly average from before. Through that Bend Point equation, you get
90 percent of your first nine hundred and sixty dollars and thirty
two percent of everything you made between five thousand seven hundred and
eighty five and nine hundred and sixty dollars and fifty thousand. We won't have to worry
about that third bend. So now we have our number. You can expect a monthly Social
Security check of one thousand eight hundred ninety dollars if you wait
until your full retirement age. But there are two big factors that
will affect how much you take home every month, one of them being cost
of living adjustments or colas, which we've assumed will be a two
point six percent pay bump. Social Security gives retirees every year
to keep up with rising prices. And secondly, if you wait a few
years to claim your benefits, you could add hundreds of dollars
to your monthly benefit. Check your first eligible to begin
receiving your Social Security benefits at age 62. But you won't get the full benefit
amount until the full retirement age of 66 years and eight months. Back to our hypothetical case. If you wait until 70 to collect
benefits, your monthly check jumps to almost three thousand dollars. That's over a thousand dollars more than
you would have gotten at your full retirement age every month for
the rest of your life. One trillion dollars in benefits will be
paid out to about 65 million people in 2020. So where does all
that cash come from? Social Security is financed through
a dedicated payroll tax. Like we said earlier, every working American
pays six point two percent of their wages to the government on everything
they earn, up to one hundred and thirty seven thousand
seven hundred dollars. Employers match that amount. Or if you're self-employed, you pay
twelve point four percent into the Social Security Trust Fund. All of Social Security's payroll taxes
and other sources of income are deposited into this fund, and all
the benefits and administrative expenses are paid out of this fund. I think of Social Security like a
pay as you go type program, benefits being paid out today mainly come
from payroll taxes collected from today's workers. Now, for over 30 years,
Social Security was flush with cash. It took in more in payroll taxes and
other income than it was paying out in benefits and expenses. And the fund didn't just sit there by
law, income to the trust fund must be invested on a daily basis. So they did just that. Income to the fund is invested
in interest bearing Treasury securities, earning an average interest rate of two
and a half percent in 2020. Every dollar of the trust fund is
invested in the United States Treasury securities, their special securities only
designated for the Social Security trust fund, and that actually
gives them advantages over regular Treasury securities. U.S. Treasury securities are considered the
safest kind of asset to back any claim that you have. And so at the moment, they're held
in an extremely safe, although new, low yielding kind of investment. As of the end of 2019, the trust
fund was up to almost two point nine trillion dollars. At the moment, the trust fund is
very near its all time peak. In terms of dollars, it's not it's not
near a peak in terms of how many years of benefit payments can we afford
to spend out of the trust fund. But nonetheless, it's in a very
high level at the moment. But here's the thing. Since 2010, the payroll tax hasn't
been enough to cover benefit payments for the massive baby boomer generation
that started to retire in 2016. The deficit of 75 billion dollars was
covered by the interest earned on the trust fund in 2019. Interest covered almost eighty one
billion dollars of benefit payments. But starting in twenty twenty one, living
off the interest won't be enough because people are living longer and
millions of baby boomers are retiring. Social Security will have to start
to draw down from the trust fund itself to help pay for benefits. And even that fund
won't last forever. Experts predict the reserves could run out
by 2035, at which point Social Security would only be able to pay
about 79 percent of promised benefits. And all the while, any chance at
earning any sort of return on surplus money coming into the
fund is virtually lost. The reality is today, every dollar
that goes into Social Security immediately goes out the
door to current retirees. It never has a chance to earn
a positive rate of return over time. And that has really negative consequences if
you look over decades of not being able to invest the
money that is set aside. When you look at pension programs, about
two thirds of the assets in there are actually investment returns. And so you're stripping that
opportunity away from workers. The world wide pandemic has
complicated things even further. Massive unemployment, a recession, reduced
earnings and lower interest rates, thanks to the Fed could all
speed up the erosion of the fund. Data from the Wharton School at
the University of Pennsylvania estimates the funds could run out as
early as twenty thirty two. And the Bipartisan Policy
Center, a D.C. think tank, says the reserves could
be depleted by twenty twenty eight. This doesn't mean that Social Security
will run out of money completely, but it does mean that they'd only be
able to pay out a portion of the promised benefits. The Social Security Administration declined
to participate in this video. Now, what does this mean for you? And many policy experts agree the
federal lawmakers are going to intervene to solve the shortfall before the agency
has to resort to cutting benefits once its plan is called the Social
Security twenty one hundred act, which includes some tax increases
while avoiding benefit cuts. And that's just one of many options
that Congress has at its disposal. You can either raise taxes
or you can reduce benefits. And then there's little things along
sides that you can do. You could increase the
payroll tax rate. You could also increase the wage base
that those payroll taxes are applied to. So rather than subjecting the
only earnings below a certain taxable maximum are subject to the payroll tax,
you could subject earnings to a higher cap or even all earnings
to the payroll tax rate. Could you just do a
flat reduction in benefits? You could also increase
the retirement age. President elect Joe Biden wants to
expand the program, meaning bigger benefit checks to the Americans
who need it most. His plan to make that happen,
higher taxes on the wealthy. He wants to apply that Social
Security tax to earnings over 400000 dollars. It is worth noting that this is
a bit of a reversal for Biden, who has advocated for possible
benefit cuts in the past. There's another option that involves
no policy changes at all. Adopting how the fund
invests its money. Yes, there's more risk, but the
rate of return on Treasury securities can't compete with the kind of returns
you'll see from money invested in the stock market. And 20 20 so
far, even amid a worldwide pandemic, the S&P 500 is still higher today than it
was on January 1st if we invested in equities. Now, clearly, the Social Security
trust fund would be exposed to the risk that stock
market prices could decline. But on the other hand, they would
also enjoy the extra income that occurs because of dividends from stock
investments and because of capital appreciation. The shares that are held by
the trust fund, but those ups and downs are very minor relative
to the overwhelming need for revenues for Social Security. But the problem with this kind of
change in investment strategy, some say it's too late to make a difference
if we had changed the investment portfolio back when President Clinton proposed
it in the late 1990s. Well, it would have
made a considerable difference. Now, we would have had a much larger
trust fund, but we didn't do that. And so if we start now, when the trust
fund is expected to be used up over the next 10 to 15 years, it will
not make much difference if none of these things happen, an outcome that analysts
tell CNBC is highly unlikely. Then the Social Security Administration says
all beneficiaries would get 79 percent of scheduled benefits. Universal Social Security has been debated
for as long as Social Security has existed. The Heritage Foundation,
a conservative think tank, put together its own universal benefit plan,
one that they argue will flatten out benefits, providing more for people
who are below the poverty line. One of the biggest components that
we are recommending is shifting towards a universal benefit program. And so instead of providing the largest
benefits to the people who already had the greatest incomes throughout their
working careers and the lowest benefits to those who have the least
incomes, it would just be one flat benefit for everybody, regardless of how
much you made throughout your working career. And the benefit of this
is that it would actually lift about the bottom third of people,
would get a higher Social Security benefits. And then over time, those who
are middle and upper income would gradually shift their benefits down. But of course, it would be very gradual
over time, so that many decades in the future, you get to this point
where you have the same benefit for everybody. And another benefit of that program,
as I said, is lifting more people, the lower income earners, up. But it also can make the program smaller
and total size and scope one big benefit to this kind of plan. It would actually involve a
Social Security tax cut. We estimate that you could reduce the
twelve point four percent tax down to 10 percent. The median person who
makes about sixty thousand dollars per year, they could have an extra more
than four thousand dollars per month that we're talking about here. And I think it's about an extra
nine hundred dollars for somebody who's making almost twenty thousand
dollars a year. So this is a lot more money
that goes into those workers paychecks. However, it is important to keep in
mind that while this would put extra cash in your pocket today, the onus
would be on the individual to actually invest that money wisely. This plan, of course, also assumes
that Social Security will still be there when you retire. But one financial planner that we spoke
to says that his millennial clients just aren't holding their breath
for a hypothetical like this. Instead, they're trying to plan ahead for
a world in which there is no Social Security coming to
them in retirement. Millennials are a generation that faced
more uncertainty than any other generation before them. So it's no wonder they're asking whether
or not Social Security will be there for them. And while we don't have
an answer as to how things will look 40 or 50 plus years down the
line, we can plan around that level of uncertainty by showing them a number of
scenarios as to whether or not there will be Social Security, maybe
a 50 percent reduction in Social Security or if the system
will remain as is.
