Listen to the podcast below to hear about Financial Connections’ final podcast update for 2020.
- Social Security
- Changes in Europe
The first topic I’d like to discuss today is Social Security. I think there is a lot of misinformation out there. We frequently hear from younger people, “well there won’t be any Social Security when I get older.”
I don’t think that’s true. Is there a funding problem with Social Security? YES. Is there a risk benefits might be cut? POSSIBLY. Is it fixable? DEFINITELY.
Let me try to separate truth from fiction.
Social Security benefits are paid from a trust fund. It is actually 2 trust funds. One that pays for Disability and the other pays retired workers. I will focus on the fund for retired workers.
When payroll taxes which are listed under FICA on a paycheck are collected, they are deposited into this trust fund. Within the fund, special government securities are purchased. They are interest bearing and are a form of IOU. Future FICA taxes redeem the IOU. The interest changes monthly. As of April this year it was .0875%. The interest is similar to 4 year Treasuries.
While the intent of the trust fund was to pay benefits to workers, the reality is excess payroll taxes have been used by the government to cover federal spending. This isn’t new. It has been going on for decades. Those excess funds should have been saved for later, when there were fewer workers and more benefit recipients. That later is now.
It has been known for years Social Security is underfunded as the phrasing goes. In 1980 Alan Greenspan was tasked with studying the problem and developing short-term fixes. The Greenspan Commission recommended an increase in retirement age and increase in payroll taxes. All were implemented by Congress in 1983.
The birth year 1937 was the last year someone could receive full retirement benefits at 65. For most boomers born between 1943-1954, full retirement benefits start at age 66 and so on. The latest age at this time is 67 if you were born in 1960 or later.
As long as workers contribute to Social Security, retirees will continue to receive benefits. However, there is a risk the benefits could be cut. How much is speculation at this point. The current estimate is the fund will be unable to meet 100% of their obligations around 2034 or 2035. This was before the pandemic. However, the fund is not actually out of money. Rather, new incoming payroll taxes will need to support the retirees. Instead of the surplus from previous decades, it will be more pay as you go. The estimate is that 76% of benefits would continue to be paid.
Once the government has to make good on these IOUs, no one knows whether it will be by raising taxes, cutting benefits or increasing public debt.
What type of Social Security Reform has been suggested? Some of the obvious choices are similar to the Greenspan Commission’s recommendation.
- Increase the retirement age – We all know people are living longer which means benefits needs to be paid for longer. The average age of death when Social Security was created, 1935 was 61.7 when only 9 million people reached 65 or older. If you were born in 1950, 12.7 million people are 65 or older; birth year 1960 the number is 17.2 million. Obviously, the original system has to be updated to compensate for our longer life span and by definition, our benefits having to last many more years.It seems obvious that raising the age to collect benefits makes sense so long as the change is gradual and doesn’t hurt those close to retirement.
- Increase payroll taxes – starting in 2021, the maximum earnings subject to Social Security payroll tax will be $142,800. It seems to me, increasing the cap makes a lot of sense.Biden is suggesting having a donut hole after $142,800 with payroll taxes starting again at $400,000. There is also legislation proposed by Rep. John Larson of CT increasing employee and employer contributions by 1.2% or roughly 50 cents/week.
This funding problem has been known for decades and Congress consistently kicks the can down the road as the saying goes. However, it seems very shortly that option will no longer exist.
The second topic I wanted to share are some of the interesting changes in Europe. In 2019, Christine Lagarde became President of the European Central Bank AKA ECB – the equivalent of our Federal Reserve Bank. She is a business person and lawyer. From 2011 – 2019 she served as Chair and Managing Director of the International Monetary Fund. She also previously served as France’s Finance Minister.
In a recent interview with the NY Times, she was asked about her agenda to fight climate change, improve global cooperation and nourish credibility of international institutions.
This certainly doesn’t sound like a banker. When asked about the agenda she said that is part of the point. Based on her previous experience and being a woman, she hopes to accelerate change, especially focusing on saving the planet.
In previous positions, Ms. Laguard hasn’t shied away from controversy. This interview offers some examples.
Ms. Laguard said she feels that women bring the power of life. She feels that birth makes a difference to your view of making sure your children inherit a sustainable planet. She said studies show how resilient women are and this is necessary in the face of changes that are needed.
There are other leadership positions now held by women. The most well known is probably German Chancellor Angela Merkel. Germany is the most populous country in the European Union. Ursula von der Leyen is European Commission president. A graduate of the London School of Economics, she also holds a medical degree.
Lagarde was asked if working with Merkel and von der Leyen has made a difference. She said the 3 of them know each other well and they have easy communication between them. She also believes they have less vanity. Getting credit isn’t as important as getting things done.
Some of the other women heads of state in the EU include Norway, Iceland, Georgia, Romania, the Balkans and Baltics to name a few. It will be interesting to see if they can have a positive impact.
Now for some different news.
Human ingenuity never ceases to amaze me. Many people want something different to working at home but still need to work remotely. In Japan, you can rent a Ferris wheel seat styled as a cubicle. It has a view and free-WiFi.
The Marriott offers day-passes to work in a hotel room. The Hyatt Regency in Huntington Beach offers ocean views, use of the gym and pool as part of their day-pass. Hilton and other Hyatts are jumping on the bandwagon.
Kroger – America’s largest supermarket chain will be phasing out all single use plastic bags to be replaced by reusable alternatives by 2025. When fully activated across the 2,800 stores, it will eliminate 123 million pounds of waste a year.
And in the spirit of giving, an anonymous shopper in Bristol, TN donated almost $65,000 to pay off the balances of items on layaway. What a great visit by Santa.
This will be the last podcast for the year. The team at Financial Connections wishes all of you and your loved ones a happy holiday season. We look forward to a better and healthier 2021.