Why the 8.7% SS COLA is Bad News

Advisors must warn their clients why the real figure is -23%!

Ric Edelman: It's Tuesday, January 10th. I'm keynoting at the Mariner Wealth Advisors Annual Conference, several hundred financial advisors. My good friend Marty Bicknell invited me to speak to everybody about what's happening in crypto, and most importantly, what's the advice advisors need to be providing clients about crypto. And no, it's not about whether you should buy crypto and how to buy crypto. It's really about the financial planning elements of crypto, the tax implications. Are you doing tax recordkeeping and reporting correctly? It's about philanthropy. So many people have made so much money in crypto over the past decade that they are now very philanthropic. How do you give away your bitcoin to charities who don't know how to accept it? There's also massive estate planning considerations. Is your crypto included in your will and in your trust? And finally, I hate to say it, but it's a fact: Divorce planning when it comes to crypto. 

So I'm giving a big, long presentation to all the advisors. I'm doing a lot of speaking around the country to advisory groups, teaching advisors, the financial planning aspects of crypto which really have nothing to do with whether you recommend crypto or not, whether you like bitcoin or not, is really nothing to do with it. 20% of U.S. adults, including therefore 20% of clients of advisors, own bitcoin and very often they don't know the financial planning elements about it.  And that's what I'm doing speaking on this topic.  

But that's not what I'm here to talk with you about today. What I'm here to talk with you about is Social Security. You know that Social Security benefits are rising 8.7% this year. It's the biggest cost of living adjustment (COLA) since 1981. 70 million retirees are getting bigger checks thanks to this. And that's on top of a 5.9% increase last year. This year's benefit is an average increase of $140. That's a big deal for someone who is getting less than $1700 a month. That's the average Social Security check.  

Now, I want to focus on these numbers for you to help you really understand this. Are you a retiree and are you married? Well, half of all married retirees get half their total income from Social Security. And if you're a single retiree, 70% of you get half of your total monthly income from Social Security. And it's just rather astonishing. 21% are married retirees. 45% of single retirees get almost all their income from Social Security, 90% of it. This is not the way it was supposed to be. Social Security was created back in 1935 as a social safety net. It was meant to prevent you from becoming impoverished in retirement. It was supposed to provide only 30% of your retirement income.  

But today, nearly half the country treats it as their major source of income, sometimes their sole source of income. And while this big pay raise of 8.7% sounds like a lot, it's not. I mean, it's not profitable at all. That big increase is just helping you keep up with the cost of living. Inflation, as we all know, has skyrocketed over the past two years. It's the fastest rise in inflation in decades.  

Social Security Trust Fund Shortfall 

And here's where the pressure really gets applied. It's the Social Security Trust Fund. You see, the trust fund is being depleted. It's been years since we've been collecting enough in Social Security taxes to pay all the benefits that all the retirees are getting. What's happening is that the Social Security Administration is turning to the Social Security trust fund to make up the shortfall. And the trust fund is being depleted. It'll be gone by 2034 at that point. We're talking roughly 10 years from now; Social Security will only be able to pay out 77% of its current benefits. That's how much it's collecting. And tax revenue. It's only collecting in taxes 77% of the total money it's paying out.  

If Congress doesn't act, that means that retirees in ten years are only going to get 77% of their current benefit. Benefits are going to shrink by 23%. And these new colas, these new increases, you know, the big 5.9% increase in late 2021, the 8.7% increase in late 2022 - these new increases are only making the situation worse because it's increasing the amount of money that retirees are getting, which means we have to dip into the trust fund even more.  

The trust fund is now going to run out of money a full year sooner, not 2034, but 2033. And if the Fed doesn't get inflation under control this year, there's going to be another big COLA adjustment next year and the trust fund will run out of money that much sooner by 2031. Your ego is writing checks, your body can't cash.  

So why is all this happening? Well, it's because of how the Social Security system was designed back in 1935. When it was created, we had a lot of workers and not very many retirees. That's because life expectancy was so short. In the year 1900, life expectancy was 47. By the time we got to 1935, there were very few people living into their 60s. And you didn't get any Social Security benefits until you were 62 and you were going to be dead by 65. We had a lot of people working in the factories and on the farms. We didn't have a lot of people living in old age, sitting in rocking chairs. In 1935, there were 159 workers for every retiree. That's 159 people putting money into the system through taxes, but only one person taking money out. 159 workers for every retiree.  

That was 1935. Today, there are only three workers for every retiree because our workforce has not grown, but the number of retirees has. You're not dying at 65 the way that you're supposed to, the way that FDR expected you to. Instead, people at 65 are living to 95. Social Security is finding itself paying out benefits to far more people for far more time than anybody ever anticipated way back in the 1930s, nearly 100 years ago.  

And so here we are. What does this mean? It means, as I said, in nine or 10 years, the Social Security Trust Fund will be gone. And that means retirees will only get 77% of the current benefit they're getting today. So many retirees so heavily dependent on Social Security for their monthly income; remember I said half of all retirees get half of their income from Social Security. 

So if your current benefit is $1700 and it suddenly gets cut by 23%, well, this is going to push tens of millions of retirees into poverty. They won't be able to afford their homes. They won't be able to afford medicine or food. Do you think Congress is going to tolerate that? How is Congress going to prevent this? There's only one way you can raise taxes on all of the existing workers, and you'd have to raise taxes by massive amounts 10%, 20%, 30%. “Everybody has to pay taxes, even businessmen that rob and steal and cheat from people every day,  even they have to pay taxes”… 

Or Congress could lower the benefit slowly, gradually, over the next 10 years, reduce the benefit by 2% per year for 10 years. So by the time you get to 2031, your benefit will be lower, but you'll be used to it. It won't be the shock of suddenly having a 23% cut. Or you could delay the benefits. Congress could say you're not going to get benefits at age 62 anymore. You're going to have to wait until 65 or 75. I mean, we are all living longer. So maybe we all ought to be working longer before we start to get Social Security benefits.  

Think about this. Raising taxes, lowering benefits or delaying benefits, those are the only options Congress has. You name for me the member of Congress or of the Senate or the occupant of the White House, you name any politician who gets elected by raising taxes or lowering benefits.  This is the theme song for Capitol Hill when it comes to Social Security. Everybody knows about the problem that the Social Security Administration is facing. We all are aware of the depletion of the Social Security trust fund. We all know how to solve the problem. And we all know that nobody wants to go anywhere near it because nobody gets elected on a platform of solving it.  

Nobody gets reelected by raising taxes or lowering benefits. This is why Social Security is the third rail of American politics. And this is why it is highly unlikely that we are going to see any solution about this until the trust fund is on the verge of imminent collapse - which is around 2030, 2031. My message to you is this: since this show is called The Truth About Your Future, your future will be filled with a combination of higher Social Security taxes and delayed and reduced Social Security benefits.  

It'll be a combination of all the above so that everybody's unhappy. And it means that you need to anticipate that your future Social Security benefits will be radically less than today's Social Security benefits. When you get that statement from Social Security every year telling you what your future benefit will be, cut it by 25% because that's what you need to anticipate your future benefit being.  

In other words, make sure you are not setting yourself up for a future where you are dependent on Social Security for your personal finances. And if you need help on this, talk to a financial advisor who is knowledgeable about Social Security planning so they can help you figure out when you should take Social Security and how to factor it into your overall financial plan. I'm Ric Edelman. I'll see you tomorrow.