BUZ LIVINGSTON: Smoking financial crack, Demise of Social Security is greatly exaggerated

Published: Thursday, July 11, 2013 at 04:21 PM.

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.

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