Your Money in 20

Ep. 38: Social Security - Is it Still Secure?

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In this episode, Laura Neal, CFP®, and Vic Colella, CFP®, CDFA®, take a walk down memory lane to detail the changes to the US Social Security system since the 1970s.  We share our takeaways, ways to fund the shortfall, and how this should impact your Financial Plan.  

If you have suggestions for episode topics or would like to give us feedback, we would love to hear from you! Please email us at podcast@woodwardadvisors.com.

Victor Colella:

Hello everyone, and welcome to another episode of Your Money in 20, a podcast by your friends here at Woodward Financial Advisors. I'm joined today by Laura Neal, a regular here. Hi, Laura.

Laura Neal:

Hi Vic. Always glad to join you.

Victor Colella:

Yeah, so Laura, uh, we are here today to talk about social security. Everyone's either favorite or least favorite topic or source of anxiety, uh, especially in the latter months here. So. Um, we're looking forward to digging in there. I'll talk more about what that's gonna be. Uh, before I do, I like to say our disclaimer, which is that you're gonna hear about a lot of things, some tax related, some obviously related to social security. Um, none of what we talk about here today is meant to be advice for your specific situation. If you need tax advice, go to a tax professional. If you need investment advice, talk to your financial advisor. We know if you, if you don't have one, um, and if you need legal advice, talk to an attorney. With that outta the way, Laura, uh, what are we gonna talk about with Social Security today?

Laura Neal:

Well, Vic, we're gonna start out with kind of a brief history. So I'm sure that most people that are listening to us today, um, this isn't the first time in their lives. That there has been worry surrounding, uh, is social security gonna be around for the long haul? And so we thought we kind of start out going back and giving you a brief history and time of the Social Security system, and then we'll kind of wrap up with and what it means for you and your financial plan.

Victor Colella:

Yeah. Yeah, we, we often talk when clients bring up social security, uh, either. Uh, you know, in any way we refer to the history, but we don't just off the top of our head have, well, here's what happened in this year. Here's what happened in that year and how it took effect. We don't have time for that, usually in the context. So we're gonna dig deep today and talk history. So, Laura, what I'll do, I can just sort of kick off, uh, you know, the dates of major changes. You can give a little description of what, what happened, and we can talk a little bit about each.

Laura Neal:

Sounds

Victor Colella:

good?

Laura Neal:

Mm-hmm.

Victor Colella:

All right. So, so first of all, 1977. So social security, I, I believe it, we didn't actually find this date, but I think it was the late 1930s when it went into place, but it was a, it was a product of the Great Depression. Uh, so the, the years following, uh, creating some sort of safety net for folks after the Great Depression and all sort of the tragedy around that. Um, the next major amendment that we found was in. 1977. Uh, so

Laura Neal:

cool decade. The decade I was born. Yeah.

Victor Colella:

Right, right. Good music in the seventies. I'm a fan. Um.

Laura Neal:

right. That's right. So in 1977, so everybody's really familiar now with the concept of delayed retirement credits. And if you don't know what that means, that's that concept of if you wanna wait and not claim at full retirement age. Um, you can get an increased monthly benefit, for every month. You wait year, you wait up until age 70. So this actually started in this 1977 amendment they made. Um, the beginnings of this went into effect. You used to be able to wait until age 72 they backed it up and said, no, we're just gonna give you extra credits just until 70. So that was kind of the first thing we found. That was a major change in the system,

Victor Colella:

Yeah, and I'll just briefly say context. In the late seventies, uh, a tumultuous time in a lot of, a lot of ways politically, I mean, this is, uh, right in, you know, the era, uh, where stagflation wa, I mean, the, the oil embargo was in the early seventies. You had rampant inflation stagnation in markets. So wages were not in a good place. So this was a result of.

Laura Neal:

Yeah. Yeah.

Victor Colella:

Financial troubles, payouts were increasing because of inflation adjustments, but pay in was decreasing because of unemployment and a bunch of other sort of factors around it. So context matters because we're, many people are worried today because of context that is similar. So that's what was going on in the late seventies.

Laura Neal:

Yeah.

Victor Colella:

All right. Should we move on to the next major change, or do we have anything else? I.

Laura Neal:

no, I, I, I guess I'll just say that, um, just for further context in that you get an 8% per year bump. So if your full retirement age is 66 and eight months or 67, you get 8% per year. So that's,

Victor Colella:

Yeah,

Laura Neal:

of how it ended up, um, flushing out in the end.

Victor Colella:

and that's still what it is today. So that hasn't changed since the late seventies. Um.

Laura Neal:

Mm-hmm.

Victor Colella:

Alright, next one's NI 1983. So this one is, A lot of folks are familiar with the Reagan era change. This was probably the broadest, sweeping change to date. Uh, I think there have been other little changes around the edges we'll talk about, but this was a big one. So, Laura, run through some of the changes that, uh, president Reagan put into place in 83.

Laura Neal:

I mean, if we put, if we wrote down all the changes and explained all of them, we could probably have an hour podcast here. Just all the things that went into effect in 1983.

Victor Colella:

Right.

Laura Neal:

pulled out the ones that, um, stood out as, as big things that have affected us, you know, even, even now. So the whole full retirement age forever, full retirement age was 65. Everybody knew they could

Victor Colella:

Mm-hmm.

Laura Neal:

and that's when they got their full social security So as a result of what Vic you were referring to of this time of inflation and lower job growth numbers, there was not as much money coming into the social security system. So as a result, one of their, um, reforms that they thought will help bolster the system is we'll up the full retirement age. But they upped it really, really slowly. So it went from 65 to now the oldest full retirement age is 67, and we were talking about this before the podcast, and so that really won't fully take effect until people start retiring in 2027.

Victor Colella:

Yeah. This blew our minds, uh, a little bit before this podcast. So they wrote a, a law change in 1983.

Laura Neal:

Mm-hmm.

Victor Colella:

That had provisions that weren't fully in effect until 2027. They thought we were gonna be driving around in like Jetson style cars, uh, back then in 2027 and finally that, that change would be fully realized for retirees.

Laura Neal:

Yep.

Victor Colella:

That's gradual. Uh, yeah. Yeah, yeah. Yeah. So both you and I won't get mm-hmm.

Laura Neal:

another thing is benefits became taxable. That's so commonplace to us now that to 85% of your social security benefits can be taxable now, but you. To have zero tax on'em. And so they, um, did taxation up to 50%.

Victor Colella:

Mm-hmm.

Laura Neal:

to 85%, just up to 50%.

Victor Colella:

Mm-hmm.

Laura Neal:

also, new federal employees hired after this 83 amendment were required to join Social Security. Previously they had. Just their own system. They weren't part of the social security system. And then self-employed workers faced increased payroll taxes. So we now know that if you're self-employed, you have to pay in both for yourself and for you as an employee or so that used to not be the case.

Victor Colella:

Yeah, and, and those are the big ones. But we encourage you if you, this is interesting to you for some reason, like it is to us ssa.gov. So they have a history page that goes through all past changes in great detail. Uh, check it out. This one is, we've covered maybe 20% of the changes. It's just the big ones. Um, and yeah, I think there were lots of other changes including the structure of the trust fund itself. So

Laura Neal:

and

Victor Colella:

any.

Laura Neal:

the 85%. And so they waited about 10 years and they said, uh, you know, I think 50 percent's not quite high enough attacks. On the, or not a tax, but the taxable amount of your social security benefits. So they upped it from 50 to 85% in 1993.

Victor Colella:

Yeah, and, and this is a question we actually do get a decent amount still, which is our Social security benefits taxable. The way that it works is based upon your other income. Either zero, 50% or 85% is taxable. That's still true today. So 1993 was the last change to taxability rules. I even think that the brackets have remained the same, uh, since then. Yeah.

Laura Neal:

goes up pretty quickly

Victor Colella:

Yeah,

Laura Neal:

you don't have to make too much to get that full 85% taxed.

Victor Colella:

yeah. And, and for example, the, the, the joint filing threshold for 85% is$44,000 today. It was also$44,000 in 1993. So in effect, not changing those brackets has meant that the income threshold to be taxed at 85% has gone down just because a dollar's worth a lot more in 1993 than it, than it is today. So just there are some of those things that just haven't changed, which is a way of adjusting the math for the system.

Laura Neal:

Yeah, that's a good

Victor Colella:

so now fast forward, we're in the, the new millennium. It's 2000. What happened in 2000?

Laura Neal:

There was another, uh, another social security bill. Um, actually two, so there was a small one, like right at the turn of the century, um, called the. Senior Citizens Freedom to Work Act. And so I think this came about as we saw more and more people working later into their years. So it used to be that if you chose to work past 65 or whatever your full retirement age was, you could not claim you could get your full retirement benefits through Social Security. You got a reduced amount. And afterwards they said. No, you can get your full retirement amount. We're just gonna tax you on it. So like we spoke of before.

Victor Colella:

Yeah.

Laura Neal:

There was a pretty big change.

Victor Colella:

Yeah. And for clarity, that rule is still in place where your benefits can be reduced if you earn too much and you claim your social security retirement before your full retirement age, that's still exists. If you're both, that's one of the reasons we say at least wait until your full retirement age. Ideally wait as long as you can because. If you're still working, even, even sort of part-time or consulting basis, you may actually get a reduction in your social security benefits, uh, until you get to full retirement age. So that's an important, an important distinction. Um, all right, fast forward again. 2015 is where we're at now. What happened in 2015?

Laura Neal:

Well, so a lot of people would take advantage of what we would call some loopholes in the system, and so they would do what was commonly referred to as file and

Victor Colella:

Mm-hmm.

Laura Neal:

a restricted application. So oftentimes, you know, if, if one spouse has. than twice the benefit of the other. There's something called a spousal retirement benefit where you can get at least half of your spouse's retirement. And so, uh, one spouse would file suspend their, uh, benefits to accrue. Larger benefits and then take advantage of the spouse getting it. And, and they finally figured out that this wasn't good for the system that was already struggling. And so they got rid of that. Um, so just aiming to close some of those loopholes, especially ones that were benefiting, um, wealthier retirees.

Victor Colella:

Yeah, I think about this as the, the, the good old days of retirement social security planning, because as advisors, and this is why it benefited wealthier, uh, wealthier folks more is that if they had somebody who knew how the system worked, there were ways that you could game it, uh, and within the law, right? That's how the law was written. But not everyone understood them. And it was a time where you could really, you, there were some strategic moves that you could make when filing. There are still a few of these left, but like I sometimes say, the goodies have all been taken away from us. Uh, it's a lot simpler than it used to be, which is a benefit for everyone. But some of those strategies aren't there anymore. Um, let, let's hit cost of Living adjustments briefly. So, um, because that's the most recent changes. Uh, well actually this happens almost every year, but yeah.

Laura Neal:

Yeah. we adjustments every year, but just notably that, um, in 2022, they had a 5.9% adjustment, and 23 and 8.7% was. The highest adjustment since 2000, or, I'm sorry, 1981. So, um, just, just a note that they, they did try to bump up benefits to keep up with inflation that we were seeing at the time.

Victor Colella:

Yeah. Yeah. Which can create, if wage growth isn't there, it can create a problem where you're paying in less because wage growth lags inflation. That's some of what drove these changes back in the eighties. So it's, it's something to keep your eye on. There's gonna have to be changes to make the math work.'cause everyone likes to point out in news stories, basically every couple of years, uh, it goes through all the major news. Uh, networks, um, things are gonna have to change. Uh, so why, why don't we actually shift? So let's shift to how do we interpret all of this history, uh, for our clients' benefit when they come and ask us about social security, I.

Laura Neal:

Yeah, so I think my biggest takeaway, and as we were, you know, prepping for this is that. A lot of times the fear it when these news stories come out is, am I gonna get a paycheck next month, right? Am I gonna get my check next month? Are they gonna cut my benefits in half? So I hope you have seen that as we go through this history lesson. that they do is very forward looking and sometimes super forward looking. Right? retroactive. It's never saying, okay, you've been getting$30,000 a month. We're cutting your benefit in half. So I think, to me, that was my biggest takeaway. What do you think Vic?

Victor Colella:

Yeah, always forward looking. I mean, some of the taxability you related things would've changed what you got after tax, if you were making above a certain amount. But, um, incremental, retroactive, incremental, uh, this has been called the third rail of politics. Right, because there is a fact that has been true and is still true today, is that the, the demographic group that votes in the highest frequency are the folks who are receiving their social security paycheck, their social security retirement benefits. And that's why it is a favorite football to generate fear for political gain. Both sides do this, right? It is a, it is a thing that's been happening since it's existed. Um. Tune out the, the, the noise around that and, and look, use history as a guide. There's a reason that this has been true throughout history. Um, and there will be changes. Um, without a doubt there will be changes. So, Laura, let's talk about how this should impact your planning. So, so you're, you're thinking about social security. When should you file, how should you factor it in when you're planning for the future? Uh, you put some thought into this. So, so what, what are some of the impacts for financial planning for folks?

Laura Neal:

I'd say first and foremost that um, you wanna plan when to take your social security. Thoughtfully with a financial advisor in the context of your overall financial plan. We don't want anybody taking, making their social security decisions around fear, right? We don't want anybody taking it at 62 because they're afraid the gonna go away, and then they're giving up of that benefit. Um. Vic laughed at me when I told him this story, but I got a recent issue of my A A RP magazine, which is a surprisingly good magazine, um, has, has people on the cover where I'm like, I

Victor Colella:

Yeah.

Laura Neal:

you're my Um, but it was talking about and speaking, you know, mostly to people who don't work with advisors, but about how much money people are live leaving on the table by not. Waiting until age 70 to claim their benefits.

Victor Colella:

Yeah, and I'll say the most important variables, as Laura was saying, in the context of your financial plan, it's. Family longevity matters a lot. We talk about this a whole bunch with clients who are thinking when to file. Basically there's, there's usually a break even somewhere around your early eighties where if you think you're likely to live beyond that, the strategy of waiting as long as you can makes sense. It also, the other variable that matters a lot is what's the rest of your cash flow situation look like, right? Do you need the money now? Uh, do you have other sources to pull from? So that's a big factor too. Um, there was one that we talked about that I wanna mention is. So let's say you're many years from being of age to take your social security benefits. How should you factor it in? Should you use the number on ssa.gov and say, I'm probably gonna get that adjusted for inflation? Well, this is where we do think it makes sense to be a little conservative. We know based on the math that there will be changes. So that doesn't mean say I'm not gonna get any social security, that's probably not gonna be. Correct. But thinking that you're gonna get the version of it that exists today also wouldn't be correct. So you could use a lower inflation rate, you could use some percentage of social security. There are lots of ways that we can do this. Um, but it, it is a reality that the numbers have to change, uh, for the math to continue to work over the long term. And we have no doubt that they will, um, because of that whole third rail thing. Uh. But, uh, yeah, it makes sense to be conservative. Does that make sense, Laura?

Laura Neal:

Yeah, absolutely.

Victor Colella:

Well, I think that's, uh, well, we had one more thing. Uh, this is, yeah.

Laura Neal:

to a conference and they gave me a good piece of advice that I took this weekend and I wanna pass on. So the social security website changed its log in, um, credentials around March of this year. And so there is a different way that you have to log in. So I recommend everybody go to ssa.gov. up your login credentials. Print out not only your statement, but print out your full earnings history that shows every single year of what you earn. Print that out, put it in your safe where you keep your other documents. Just a little.

Victor Colella:

policy. Yeah. Yeah. Perfect. Well, thank you Laura. This has been great. I learned a few things in doing the research here, and we hope it's helpful for all, all of you, uh, potential social security recipients in the future out there, um, or current recipients. So thanks a lot.

Thank you for listening to another episode of Your Money in 20, the podcast by your friends here at Woodward Financial Advisors. We hope you enjoyed it. Now, if you'd like to continue the conversation, you could find us on the web@woodwardadvisors.com, and as a firm on both Facebook and LinkedIn, there's a link to those pages at the bottom of our website. You can also find us all as individuals on both Twitter and LinkedIn. Now, we love receiving listener suggested topics, so if you have a topic you'd like to hear more about. Please hit the Let's Talk link at the top of our website and submit a message with podcast in the subject line. Thanks again for listening and talk to you next time.