Social Security can be a sensitive subject. Many are deciding what role it will play in their retirement plan, while others wonder if they will receive any social security at all. Eric Jacobsmeyer is a Senior Wealth Strategist with Zions Trust and is here to help us understand more about social security and what we can expect from it, now and in the future. Eric holds a Certified Financial Planner designation and is also a Certified Public Accountant.
Let’s start off with a little bit about the history of social security; when did it start?
It started after the Great Depression and was instituted in the mid-nineteen thirties. The original reason why it was started is because there were a lot of people in poverty. Most of them were migrating from farms into the cities and they needed to create a program to help support those individuals. The original program was designed to provide a steady stream of income for workers that reached aged 65.
Social security has faced a lot of intense scrutiny especially with rumors of everything eventually running out. What is your take on that?
I don’t think it’s going to run out simply because of the way that it’s structured. It is a pay-in, pay-out kind of a program. As the money comes in from the workers through payroll tax, it’s going out to those that are benefiting, those that have retired. There is always going to be that, but the problem is when you have a spike, as it relates to where we are right now with the baby boomers all retiring. There will be more people benefiting from the funds than people actually providing the funds.
I have read individuals in their twenties and thirties can expect a 77 percent benefit? Is that number accurate?
It is actually. It’s somewhere between 73 and 77 percent and that goes back to how it’s funded. Right now it is paying into the system and there is a little bit of excess, but starting in 2020 that excess is going to start dwindling down and in 2033 is when people really start to worry. At that point the reserves are gone and you’re only getting about that 73 to 77 percent benefit.
What’s happening to fix the problem? Is there a way to fix the problem?
There are ways to fix it. You can increase the payroll tax to help fund a little bit more into it; not a great solution but a solution. You could also extend the full retirement age a little bit longer. People are living longer and shortening that benefit period would help out. There are options, it is just having Congress come to an agreement and make some changes.
There have been some changes because people used to rely on pension plans and those are dwindling out.
I think thirty years ago people were working. They would quit working, get social security plus they would get this pension and all the investment risk fell on the employer. Well now that has switched. Now the majority of them are defined contribution plans and 401Ks and so those employees now have to figure out how much to fund and how to invest it.
In essence, all of that is going to be falling on us, the investor. What do we need to do to plan for that because we can’t rely solely on our social security for our retirement?
True and right now social security funds about 35 to 40 percent of those that are retiring, their retirement income. So that remaining 60 to 65 percent you are going to have to sock away in 401Ks and IRAs and plan for the future.
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