Advisor Marketing on the Latest Social Security Bailout

Social Security is back in the news these days. And the news isn’t pretty. We’ve seen a steep and prolonged drop in employment during this recession. Now social security tax revenues have now fallen below the benefits being paid out to current retirees. This hasn’t happened in 25 years so Congress needs to “do something” and you may get asked your opinion on this. Maybe in your office and maybe on your live radio show.

Financial advisors need to walk a fine line here. You have clients born before 1946 when the baby boomers first came on the scene. You have baby boomer clients who have retired after paying into Social Security their entire working careers. Other Baby Boomers have paid into Social Security for decades who won’t receive full benefits until age 67. You may have a growing number of Gen X/Y clients who will pay the most into Social Security and get the fewest benefits.

A couple recent articles underscored the coming generational battle over funding Social Security and who gets what benefits. One article on placed the blame squarely on the shoulders of the Baby Boomers:

Will Baby Boomers Bankrupt Social Security?

As the record federal budget deficit draws increasing scrutiny from Washington to Wall Street to Main Street, deficit hawks may take aim at entitlement programs including Social Security.

And, the nearly 80 million Baby Boomers phasing into retirement will set in motion a dynamic that—if not addressed by Congress—could result in the next generation getting fewer benefits.

After some soothing words about the strength of the ‘trust fund”, the article describes the affect of the Baby Boom generation:

Looking back, the outlook was rosy for most Americans in 1946, the year earmarked as the beginning of the so-called “baby boom.” With World War II finally over, a 15-year stretch of bad times that had begun with the great Depression was finally over. They responded by having more babies than ever before, more than 78 million of them by 1964.

For Social Security, the mini-population explosion was both beneficial and problematic. Social Security is funded mostly through payroll taxes, with present-day workers funding the payouts for retirees. Since there have been so many Boomers in the workforce for so many years, there were a lot more people putting money into the system than taking it out.

As Boomers begin to retire, the huge group of people putting money into the system will begin taking it out of the system, which then will be funded by a generation of workers—the so-called Gen X—whose numbers are some 15 million fewer. The surplus of money paid into the system by Boomers will allow it to run into the late 2030s, even though it will begin paying out more than it takes in by 2017.

Before I show how the 2017 forecast won’t happen, let’s listen to a Gen X’r to get a taste of the coming divide:

Count Gen-Xer Tom Firey among those younger workers who think they’re getting the short end of the stick. The managing editor of the conservative Cato Institute magazine, Regulation, first wrote about the subject nearly 10 years ago in a column headlined, “Boomers Fleece Generation X with Social Security.”

“Ever since we Gen-X/Yers began working, we’ve paid 12.4 percent of our earnings to Social Security,” he wrote. “In contrast, the Boomers will get a bargain. When they entered the workforce in the late 1960s, they paid only 6.5 percent of their earnings to Social Security. Only from 1990 on, when the Boomers had earned paychecks for a quarter-century, did they start paying 12.4 percent to Social Security, the same percentage we Gen-X/Yers have paid our whole lives.”

That’s why Firey dubbed it The Boomers’ Bargain: “They’ve paid less of their earnings into Social Security than we Gen-X/Yers, yet they’ll receive more in benefits than we will and we’ll pick up the tab.”

As often comes with age, Firey has mellowed some in the past 10 years, even injecting dark humor into his outlook today. He says, “The last two generations gave themselves some additional retirement benefits just before they left the workforce. The World War II generation gave itself annual COLA (cost-of-living allowance) raises in 1975, and the boomers gave themselves the prescription drug benefit earlier this decade.”

“In essence, these generations said, ‘I’m not willing to pay for these new benefits for myself, but I’m happy to force my kids and grandkids to pay for these benefits for me,’ “Firey added.

You can read the rest to learn about the Greenspan Commission of 1983. Like President Carter’s fix in the late ’70’s, the Greenspan Commission’s recommendations of benefit cuts and tax hikes spared current retirees and supposedly fixed the problem for “30 years.”

You might be telling yourself, “What about the Trust Funds? Richard forgot about the trust funds!” My short answer is, “What trust? What funds? And what security?”

The reality of the situation is that the trust funds and $3 will buy you a cup of coffee at Starbucks. Now let’s look at the math and why Social Security needs a bailout.

Next in line for a bailout: Social Security

By Allan Sloan, senior editor at large, Fortune magazine

February 2, 2010

NEW YORK (Fortune) — Don’t look now. But even as the bank bailout is winding down, another huge bailout is starting, this time for the Social Security system.

A report from the Congressional Budget Office shows that for the first time in 25 years, Social Security is taking in less in taxes than it is spending on benefits.

Instead of helping to finance the rest of the government, as it has done for decades, our nation’s biggest social program needs help from the Treasury to keep benefit checks from bouncing — in other words, a taxpayer bailout.

No one has officially announced that Social Security will be cash-negative this year. But you can figure it out for yourself, as I did, by comparing two numbers in the recent federal budget update that the nonpartisan CBO issued last week.

The first number is $120 billion, the interest that Social Security will earn on its trust fund in fiscal 2010 (see page 74 of the CBO report). The second is $92 billion, the overall Social Security surplus for fiscal 2010 (see page 116).

This means that without the interest income, Social Security will be $28 billion in the hole this fiscal year, which ends Sept. 30.

Why disregard the interest? Because as people like me have said repeatedly over the years, the interest, which consists of Treasury IOUs that the Social Security trust fund gets on its holdings of government securities, doesn’t provide Social Security with any cash that it can use to pay its bills. The interest is merely an accounting entry with no economic significance.

The last sentence might have grabbed your attention. Surprised me to see it in a mainstream publication like Fortune magazine. Maybe it shouldn’t surprise us. How do  you pay your business expenses,  with cash or with accounts receivables? Of course, you can’t pay bills with IOU’s unless you first convert the IOU’s into cash. Same problem for the federal government except that Uncle Sam is already borrowing over a trillion dollars this year.

You can read the rest of the Fortune article here:

So how do you apply your marketing mindset to handle this situation? In your office, you deal with each person or couple based on their situation. Social Security is just one more (obviously major) factor to consider.

  • All of your clients who are still in the work force should be reminded that Social Security was never intended to be the mainstay of a person’s retirement income. So they should be encouraged to work longer and save more and not retire until they have enough money invested to outlast their expected lifetimes.
  • Gen X’rs can get your sympathy: A worker earning $95,000 per year who expects to retire in 2045 will pay in $200,000 more in Social Security taxes than he or she will receive in benefits. Ouch.
  • For your retired clients, you can use annual reviews to compare their retirement nest egg against their life expectancy.  Maybe they should go back to work. Or cut their expenses. Or sell their home, downsize and invest the difference.

What if you’re asked this question on your radio show? Well, you need to be careful so you don’t needlessly inflame your listeners. Here are some possibilities:

  • You can blame Congress for spending the Social Security trust funds.
  • You can blame Congress for not acting sooner (and reminding your listeners that Congress still needs to act on the federal estate tax situation).
  • You can say that everyone’s situation is different so you can’t offer financial advice without more information (kinda wimpy but might result in a visit to your office)
  • You can offer general advice that Social Security has never been a complete substitute for comprehensive retirement planning.

My mother taught me long ago, “If you don’t have something nice to say, don’t say anything.” Kind of tough in this situation. How about, “Social Security has been a nice deal for the past 77 years and who knows what the future will bring?”