The S&P 500 retreated last week, dropping just over 1%, after chipmakers and other AI-heavy stocks fell. Consumer sentiment increased as inflation eased. The ongoing conflict with Iran could continue to impact the market, as fuel prices rise again.
We also see fears of Social Security going away, as the “trust fund” is set to run dry somewhere around 2032. Before you panic, or push your retirement out, there are some things to consider.
First, the trust fund isn’t a real fund in the sense that ordinary people think of trust funds. There is no money set aside to pay Social Security benefits. For the years when more was paid into Social Security than was paid out, Congress spent the money and left itself an IOU in the form of special government bonds. This is the equivalent of spending your savings but writing yourself a promise that you’ll pay yourself back.
Using math known only to the Federal Government, this is considered real money. As less money is being paid into the program than is going out, the difference has been made up by these bonds. When we run out of bonds, benefits will be reduced to whatever money is coming into the program, absent action from Congress. Currently, that would mean a 22% reduction in Social Security payments, but long-term, it could expand to a 38% reduction.
There are currently four serious bills in Congress that address the situation. The program can be fixed in a number of ways. First, Congress can increase the amount of income that is subject to FICA. Currently, only the first $184,500 is subject to Social Security taxes of 6.2%, which is matched by your employer for a total tax of 12.4%. This tax is on top of your Medicare tax, Federal income tax, and state income tax.
Congress can also increase that tax rate. Or means test Social Security, so that wealthy retirees receive even less benefits. Other options include changing the index used to calculate the annual cost of living increases. Currently, every person drawing Social Security receives an increase each year based on the Consumer Price Index, or CPI. Changing that to the Chained CPI, which takes into account the changes people make in spending when prices change, would have a significant impact on Social Security’s solvency.
Finally, Congress could increase the retirement age for younger workers, and index that age to changes in expected lifespans. When Social Security first began, the average life expectancy was around 65 years. It was designed for people who lived longer than expected and was not intended to pay out to most participants for twenty to thirty years.
I am a little cynical. I believe Congress will eventually fix the program, largely because seniors vote. And if benefits are cut by 22% or more, most current politicians will not be reelected. At the same time, I doubt they will fix it before they have to, because increasing taxes, pushing out retirement dates, or making other changes will make their next election more difficult.
Your action item this week is to change your car’s air filter and your HVAC’s filter. With the poor air quality, those filters are working overtime, and dirty filters force systems to work harder.
CovingtonAlsina is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.