Barron's, while consistently well written, has also been consistently wrong about Social Security. Back in the '30s the weekly labeled Social Security a Ponzi scheme. They were wrong then, likewise today. (They had Romney in a landslide, too, but that’s another story.) The most recent Trustees Report shows Social Security pays out more than it takes in, remaining on an unsustainable path.
However, the report lays waste to the oft-repeated, loaded phrase “Ponzi scheme." Boomers along with current Generation X and Y workers face a worst-case scenario of a 23-30 percent projected benefit cut. Ask a Madoff investor if they are getting 70-77 cents on the dollar. While one should not understate the impact a benefit reduction causes, overstating the problem dangerously impedes solutions.
Based on current projections, in 2021, Social Security taxes and interest from bond payments will be insufficient to pay current benefits. To cover the shortfall, the Trust Fund must be liquidated and by 2033 (current projections) the Trust Fund exhausts itself. But Social Security taxes still come in and the revenue stream can pay the bulk of the projected benefits (see above).
The need to liquidate Trust Fund assets assumes no changes are made to tax rates or benefits. Liberals and conservatives reach across the aisle to assail benefit cuts, and conservatives alone oppose increasing taxes. So we are left with the current scenario. I’m shocked … shocked to discover Congress unwilling to address a grave economic concern.
Often we take Social Security for granted while perilously ignoring the benefits. There aren’t many people on 30A who live solely on Social Security but there are thousands whose Social Security benefits flow through South Walton’s economy. A married couple with a maximum Social Security benefit can expect $45,000 guaranteed, $60,000 if both max out.
This floor gives planning flexibility to buy second homes, change careers or take multiple vacations — prime drivers of the South Walton macro-economy. Anyone who discounts the mathematical reality that guaranteed income from Social Security reduces a retirement portfolio’s variability is smoking financial crack.
Some combination of tax increases and benefit reductions will minimize or eliminate the “haircut” facing future beneficiaries. You can find a great resource at http://crfb.org/socialsecurityreformer/ for modeling Social Security rescue scenarios. The tool also shows the folly of sanctified liberal and conservative talking points. Making all wages subject to FICA taxes extends the Trust Fund roughly 30 years but requires benefit cuts for your grandkids and their children. Diverting 2 percent of the payroll tax to individual accounts exhausts the trust fund sooner (2028) and imposes more stringent entitlement cuts. Cast a pox on both houses.
Celebrity Citing: Recently some local hospitality workers discovered class does not necessarily accompany fame and fortune. Not meaning to crash anyone’s party but a certain music star could take a hint from Forrest Williams or Bryan Kennedy. While we appreciate all visitors ... be nice or be gone.
Casualty Losses: If 2013’s great deluge damaged your home, losses can be claimed on your 2013 tax return, subject to AGI thresholds and a $100 floor. Keep good records and document all damage. Personal and business losses require Form 4684. Look for Topic 515 at www.irs.gov for more detail on casualty losses.
Buz Livingston, CFP has the only investment management and financial planning firm in the entire world headquartered in Blue Mountain Beach, Fla. He helps clients along Florida’s Emerald Coast and around the country with financial decisions. Contact him at 850-267-1068 or www.livingstonfinancial.net. For timely financial tweets follow @BuzLivingston.