Monday, June 20, 2011

Why Must Tax Rates Increase? Two Words: Social Security

Why Must Tax Rates Increase? Two Words: Social Security

Okay, so does all this rap about tax rates rising because of Social Security make any sense? Social Security? Isn’t that a program into which we have already contributed money so that the only thing left is for those “savings” to be returned to us in retirement? I mean, isn’t that the way just about every other savings program –401(k)s, annuities, and the like – works?  

I wouldn’t fault you for inferring that Social Security works that way. But the rather disappointing thing is that this perception of Social Security is NOT accurate. In fact, it’s not the reality at all. Notice I’m not saying that view, in and of itself, is preposterous. Actually, I think it would be very nice IF that were the reality – but it’s not even close.

The “trust fund” misnomer

The very first thing I’d like to establish is that although we keep hearing the term Social Security “trust funds,” those words, in my opinion, are a deceptive kind of wordplay. Why would I say such a thing? Let me ask you this: What comes to mind when you hear the term, “trust funds”? You probably think of a ginormous war chest with billions or trillions of dollars (all those contributions from the paychecks of every working person), right? No – wrong! There’s no such thing as actual money sitting in any trust fund.

I want to remind you that I’m not revealing any conspiracies of any sort, although it may appear so right about now. And I am NOT telling you anything the Social Security Administration itself hasn’t already revealed.

So what happened to all that money we contributed?

The government has “borrowed” it, all of it, every last cent. In return, Washington, D.C. has issued the “trust fund” IOUs – which are basically paper saying that the government has borrowed the money.

So how is Social Security able to pay current recipients, then?

You may have heard that Social Security is a “pay-as-you-go” system. That’s how the government defines it. What does that mean? Simply put, since there’s absolutely nothing sitting in any trust fund anywhere on this planet, what happens in reality is that the Social Security system uses the payments they receive from those currently paying into it to fund the benefits for those who are due to receive them now. In other words, the money from those paying today is given to those who are presently retired, and so forth. I don’t think it’s a scam, but I wonder – really wonder – who else could run a system like that and get away with it. But hey, that’s “pay-as-you-go.”

How is this going to lead to a tax hike?

Social Security is more than 75 years old, and this “pay-as-you-go” format has worked thus far. You see, about 65 years ago, for every single American retiree, there were 45 workers paying into the system. So of course, that was simple. Who can’t collect from 45 people and settle up with one person? You’d even have plenty of extra money, wouldn’t you?

The reality and huge problem is that demographics do change. Today we have only about 3 workers paying IN per every recipient. You can tell “pay-as-you-go” is getting pretty tight, can’t you? On top of it all, add in the fact that since the stroke of midnight on January 1, 2011, an estimated 10,000 baby boomers PER DAY are scheduled to turn age 65 – brace yourself – every single day for the next 19 years straight! Now that’s a lot of people moving over from the paying IN side to the receiving end of the deal. This, coupled with “trust funds” with no actual money in them, spells only one word: TROUBLE. In my view, no matter how you massage the numbers, the system cannot continue to function “as is”!

If you are stunned by this, you shouldn’t be, because the Trustees of the Social Security program have been saying this for as far back as I am able to see in their annual reports.

It all comes down to this: the program takes in money and pays out benefits. But the government has “borrowed” all the excess contributions, so there’s nothing there now. And the government needs to pay it back! The challenge is that this is the same government that is in debt to the tune of $14 trillion+ (with a “T”) and can barely pay just the interest on that debt.

So where’s this IOU cash going to come from?

Honestly, I don’t have the slightest idea. My guess is that no politician is dumb enough to try to mess with the benefits promised to those who’ve paid into the system. That wouldn’t even be fair – to borrow my daughter’s vocabulary. In order to make things work, those currently paying into the system will somehow have to foot that bill – in the form of increased taxes. Got it now? That’s the only logical step.

What will happen to your retirement lifestyle if tax rates hike?

Of course, you’ll have less money to live on. But did you know there are things you can begin doing today (even if you’re already retired), that’ll legally insulate you completely from future tax hikes? You are welcome to join us at our next public workshop on Saturday, July 23. Reserve your seats here or call 301.949.4449. Of course you may always schedule a private consultation to talk with a professional at one of our offices.

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