From Tom Dyson, founder, Palm Beach Research Group: There are three “inconvenient” facts facing would-be Social Security recipients today. Most people don’t have any idea about these pitfalls… and will likely be blindsided by an income disruption in retirement.
Fact No. 1—The Social Security trust fund has no money in it.
In 2014, the Social Security Administration (SSA) took in $786 billion through the Federal Insurance Contributions Act tax… $73 billion short of the $859 billion needed to pay claims.
In plain English, Social Security was in deficit mode.
By 2026, the SSA will run up a cumulative deficit of $1.6 trillion.
Wait… What about all the money you, I, and every other American have paid in since 1935?
How is that possible?
We’ve been told for decades the Social Security trust fund holds trillions in assets (cumulative Social Security surplus revenues since 1935) that are collecting interest.
Particularly, at the end of 2014, we were told the trust fund owned over $2.8 trillion in assets.
This is a lie. There isn’t one dollar in the Social Security trust fund. Nada. Zip. Zilch.
Remember, that $2.8 trillion sum is book assets, not actual dollars. The dollars were spent the minute the government collected taxes.
That’s because the government isn’t required to use money collected from Social Security toward Social Security purposes (according to the Supreme Court’s ruling in Helvering v. Davis). So, it’s used that money to fund everything from defense spending to payroll expenses.
The Treasury Department took in dollars from taxes but paid the SSA in paper IOUs… redeemable on a future date.
Translation: The left hand of the government took money from the right hand of the government and promised to pay it back on “some future date.”
Consequently, there are no real assets in the Social Security trust fund.
Now, add a couple more problems to the mix. Social Security has had two problems from the start.
The first is retirement age. When the government designed the program in 1935, it set the retirement age at 65. At that time, the average life expectancy of a newborn was just 59 years. Most people wouldn’t live long enough to collect benefits.
But the framers of Social Security didn’t address the possibility that life expectancies would increase. Today, life expectancy in the United States is 79.9 years.
The second major problem is demographics. When Social Security began, there were 41.9 workers for every retiree. It isn’t too difficult to fund a program where more than 40 workers support a single retiree.
But now, in 2015, there are just 2.8 workers supporting every person collecting Social Security benefits.
By 2030, the ratio will be 2:1.
There you have it. Zero dollars in the trust fund, higher life expectancies, and a big wave of people claiming more benefits.
Takeaway: More people are going to want money paid out for a lot longer… from an account that has no money in it.
No amount of financial smoke and mirrors will prevent the system from collapsing under its own weight.
Fact No. 2—You’re not legally entitled to Social Security.
You probably thought Americans had a “right” to collect their Social Security in old age, right?
Most people see Social Security as a contract between themselves and the government. You pay money into the system, and it pays it back at a later date—guaranteed by law.
But nothing could be further from the truth…
You have no choice when it comes to paying your Social Security tax. It comes out of your paycheck automatically.
But did you know the government isn’t under the same rigid contract?
In fact, by ruling of the United States Supreme Court, the federal government is under no obligation to send you a Social Security check.
This is the clear precedent set in the case of Flemming v. Nestor.
Ephram Nestor was an immigrant from Bulgaria. He moved here in 1918 and paid Social Security taxes from the very beginning of the program, in 1936.
In 1955, when he retired, Nestor began receiving Social Security checks for $55.60 per month.
But just one year later, Nestor was deported. Turns out, he’d been an active member of the Communist Party in the 1930s, giving the U.S. government grounds to kick him out.
When he was deported, his Social Security checks stopped. Nestor sued the U.S. government, arguing that since he had paid money into the program, he had a right to those benefits.
The Supreme Court ruled against Nestor, saying the government had the right to terminate Social Security at any time.
The people who sign the Social Security checks sum it up this way:
[Nestor] appealed the termination, arguing, among other claims, that promised Social Security benefits were a contract. In its ruling, the Court rejected this argument and established the principle that entitlement to Social Security benefits is not a contractual right.
Takeaway: You have no contractual right to Social Security.
That historical precedent means it has the power to cut Social Security anytime it wants.
It could end tomorrow, and there’s nothing you can do about it. (Interestingly enough, the SSA has a full page on its website devoted to the Nestor case.)
Now, this doesn’t mean the government will suddenly stop paying Social Security benefits. Not now, anyway. (Suggesting an end to this system is political suicide.) But the risk, as unlikely as it seems, is possible.
Fact No. 3—Obama recently changed the rules affecting millions of retirees.
The government is proving that Social Security is in deep trouble already and that tax-paying citizens have no right to money collected by the SSA… by changing rules regarding certain loopholes that could have maximized retirees’ benefits.
On November 2, 2015, Congress and President Obama struck down two massive Social Security loopholes called “File and Suspend” and “Restricted Application.”
For some, these rule changes cut up to $60,000 of Social Security benefits over a retiree’s lifetime.
Could these cuts be just the beginning?
I think so. You see, no politician wants to let Social Security cuts dominate the conversation during an election year.
That’s why the government is working on all kinds of sneaky and indirect ways to pay out less money in benefits. It has to do with COLA (cost-of-living adjustment). I won’t get into all the details here, but know this:
A small clause in the Social Security Act says that if there is no cost-of-living adjustment for Social Security, then, by law, Medicare premiums can’t be raised for the majority of middle- and lower-class Americans.
Instead, 3.1 million select Americans will absorb the full increase. If you’re one of them, you’ll see Medicare premiums rise 52%. In some cases, you could lose as much as $4,200 in 2017 alone…
That’s like having nearly three months’ worth of Social Security benefits ripped away from you.
What we have here is a Social Security cut disguised as a Medicare cost increase.
If you’re affected, your Social Security money is going to be taken away from you to subsidize health care coverage for lower-income Americans.
I think this could be one of the first changes coming immediately after the 2016 election.
Bottom line: If you’re not actively working on a Plan B for the coming Social Security cuts, you should be. Congress has given us a couple of big hints of what’s to come in the months, years, and decades ahead.
There is still time to make a resilient Plan B
If you find you’re unprepared for a potential disruption to your retirement “Plan A”—like an unexpected change to your Social Security benefits—don’t fret.
My research team has been working on a series of investigative exposés on the hidden threats to retirement in America today. (As you’ll see, Social Security cuts are just one of these dangers.) At the end of the series, we’re hosting a live Retirement Roundtable discussion on the retirement crisis.
It features all of PBRG’s brightest minds… sharing their most ingenious ideas on how to earn safe income in a 0% world… and salvage retirement for millions of families. Click here to participate in this unprecedented, 100% free event.