Episode 026:
Getting the Lowdown on Social Security (Part 1)

Welcome to Elmhurst for one of the pod’s No. 1 fans: Dave’s dad.

Updates on Josh’s home reno, the listening habits of wives and whether to #TikTok.

Social Security is going to have a multi-episode arc because it’s something that basically everyone has to deal with – and wants to deal with in the smartest possible way!

Misconceptions, unknowns and fears: Josh is here to give you the basics, starting with the history of Social Security! (#TaxNerd #SocialSecurityNerd).

The roots of the social insurance program that came to be known as Social Security:

• Conceived as part of President Franklin D. Roosevelt’s "New Deal."
• The idea was to ensure that every worker contributed to a fund that would pay out and protect them in their older years.
• Signed into law in 1935 and rolled out in 1940, the age of eligibility was set at 65.
• The age of retirement was set based on the expected lifespan of an American male, which was 62 in the 1940s.
• The average American didn’t live long enough to collect Social Security when it was first instituted.

A snapshot of the trend among workers paying into versus beneficiaries drawing on Social Security:

• In the early days, 46 million workers contributed taxes while 1.1 million collected payments, about a 42:1 ration.
• With most people not living long enough to collect (or dying within a few years of eligibility) the program was at the outset structurally sound!
• Today, however, the average life expectancy for an American male is about 78. And if you reach the age of eligibility, you’re likely to live to 83 years old.
• The ratio went from 42:1 in 1945 to 3.7:1 in 1970 to 2.8:1 in 2013, the last time the Social Security Administration posted numbers.

The number of people collecting today is threatening to outstrip the number of people paying in and those who are collecting are also doing so over longer periods of time.

Josh believes that people in their 40s today can count on Social Security. Beyond that? The program will remain, but probably look different. Josh predicts:

• The age of eligibility will likely be pushed back to 70 or older.
• FICA tax contributions will no longer be capped at $150,000 of income.

Can someone who is well set decline Social Security? Josh hasn’t seen it and anyway recommends taking the funds and putting them to use for a good purpose.

Stats from Erin:

• In 2022, Social Security will replace 37% of earnings for the average 65-year-old.
• The average Social Security benefit in 2022 is $1,614 per month – or about $20,000 per year. Double that for a married couple.
• About 20% to 25% of the U.S. retired population relies on Social Security for more than 95% of annual income. You can’t take that level of benefit away from such a large percentage of the population without a massive social shift!

It takes a “pretty sizable asset” to replace $20,000 or $40,000 of income! You need to have good options figured out, which will be the focus of a future episode.

When we start tapping Social Security impacts a multitude of other financial planning decisions and impacts.

Social Security and the “three-legged stool,” which traditionally included three streams of retirement income: Social Security, personal savings and pensions. Problem is, fewer and fewer people have pensions anymore, thus creating an income gap.

Time for “Let’s Get to Know Josh and Dave”: What did your 15-year-old “self” imagine you’d be doing right now?

• Dave: Already into cooking, he was planning his first two restaurants and taking cooking classes.
• Josh: He was already heading towards finance, having had a glimpse of his father’s career and lifestyle. Prior to that? He was going to be an umpire in the summer and a chef in the winter.

Did you know that statistically it’s harder to get to the major leagues as an umpire than as a player? It’s true! The Bureau of Labor Statistics says so!

Dave Relates to Retirees (Josh is taking a cleansing breath): There are direct parallels between Josh and Dave’s friendship and the history of the Social Security system. The bond between Josh and Dave started out great but went off the rails when Josh “had the audacity” to go off to college. It messed with their friendship ecosystem in the way that increased longevity has messed with the Social Security system! But just as the Social Security Administration will eventually adapt to today’s longer lifespans, Josh and Dave will find a way to protect their friendship’s delicate alchemy. Josh weights in: Much like Social Security, Dave poses challenges but is absolutely irreplaceable and must remain a seamless part of life!

Apropos of classic 1980s sitcoms: The No.1 thing that clients want is clarity and simplicity. Think the opposite of “Alf,” the alien TV character who was asked: "Why must you needlessly complicate everything?"