Last week, the S&P 500 continued recovering on Monday and held on to those gains the remainder of the week. On a year-over-year basis, we are still positive. Economists are predicting a variety of things. This makes sense, given the joke that if you ask four economists for an opinion on something, you’ll get six answers.
Some feel that we will have a sharp, V-shaped recovery. As we reopen, demand is already there, people will go back to work, and we will quickly rebound. Others are predicting a U-shaped, or more gradual recovery. There is worry that we will have a W, meaning we’ll bounce back only to drop sharply again if we have another round of shutdowns. My personal favorite is the square root – a quick bounce back but then a long road to a full recovery.
No matter which one is correct, the same basic principles still apply: build your emergency fund, have a plan, and save for retirement. I have received a number of questions recently about Social Security. What happens if it goes away?
While my crystal ball has some deep cracks in it, I believe it is unlikely Social Security will ever disappear entirely. Right now, 14.4% of the first $137,000 of your income is paid into the US Treasury for Social Security, half by you and half by your employer. That income is not enough to cover all the benefits the government is currently paying out to retirees.
There is a trust fund, which is really not a fund at all, just a number on the government’s balance sheet. That fund is the amount paid into Social Security in excess of the benefits paid out. That trust fund is making up the difference between what comes in and what goes out. As of April of this year, it is expected that the trust fund will run out in 2034.
What happens then? Unless Congress acts, benefits will be reduced by 24%. Congress has a number of tools they can use to fix Social Security before then. They can increase the percentage that is paid into Social Security, or they can increase the maximum salary that is taxed for Social Security. They can also change how the cost of living allowance is calculated. Currently, Social Security recipients receive an increase each year based on the Consumer Price Index, a common measure of inflation. Changing that to the chained-CPI, or an inflation measurement that takes into account the substitutions we all make when prices change, would have a big impact on benefits.
Another option is to push out retirement ages for younger workers. When Social Security was created, the average life expectancy was 65. It was intended to provide aid for people who’d lived longer than expected, and possibly outlived their savings. It wasn’t designed to be paid out for 20-30 years. Moving the full retirement age out for younger workers, and indexing it to mortality – meaning it is adjusted as life expectancy increases – is another option to fix Social Security.
Whatever Congress decides to do, it is unlikely they will let seniors see a 24% drop in benefits.
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