Q. I read with interest your recent article on Medicare and Social Security. I have heard over the years that the federal government has cannibalized the Social Security fund on several occasions. Is this true, and if so, how many times and how much has actually been diverted to other programs? ---B.D., Akron, Ohio
A. It’s not true in the sense you mean it. When Social Security employment tax revenues have exceeded benefit payments, the excess revenue was exchanged for special U.S. Treasury obligations. All of that is held in the Social Security Trust fund. So in one sense, the federal government hasn’t “cannibalized” the trust fund. They have accounted for every dime of surplus revenue and accumulated interest with Treasury IOUs.
So, yes, the surplus was taken and spent on other things. And there are debt obligations to account for all of it. Those debts are backed by the “full faith and credit” of our government and its ability to levy taxes.
If our government had operated with a balanced budget, rather than borrowing ever increasing sums, then total government debt would be modest and the Trust Fund holdings could easily be exchanged for Treasury cash. But the budget was not balanced. And other Treasury debt— including borrowings from China—has become very large. So when Social Security will be looking for more cash to pay benefits, our government may not be able to redeem the accumulated debt.
It’s a cash problem and it is growing.
Q. I have asked several people about my situation and have gotten conflicting answers. Here are the major facts, and then I will pose the question. First, I am retired USAF with a $1,300 monthly pension. Second, I am a widower with a $126,000 insurance payment in the bank drawing 4 percent interest. Third, I have a mortgage with $95,000 left to pay over 11 years at 4 percent.
I am currently paying my mortgage from my pension check and letting the insurance accumulate interest. Other bills and living expenses are covered by my current job. I will also access my $128,000 IRA next year.
My question: Should I pay off the mortgage? I have been given three answers from several financial people.
- First answer is: YES, pay off from insurance and let the account rebuild from money left over and live off of pension check.
- Second answer is: NO ... keep mortgage open and use the tax deduction.
- Third answer is: It doesn’t matter the interest is a wash and the tax saving is not that big over the years.
What would you advise, or do, in this case? —R.P., Wadsworth, Ohio
A. The first answer has the most merit— pay the mortgage off and slowly rebuild the account from the change in your monthly cash flow without the mortgage payment.
The second answer is wrong because your itemized deductions from mortgage interest and taxes probably aren’t much over the standard deduction for a single filer, $6,300.
The third answer is doesn’t work because it’s not just a question of interest. It’s a question of interest and principal.
Here’s the math. The monthly payment for paying off a $95,000 loan in 11 years at 4 percent is $891, about $10,700 a year. That’s a lot more than 4 percent interest on $95,000 (about $3,800) because principal repayment is a big part of a relatively short-term loan.
In this case, you’re now paying about $3,800 in interest and about $6,889 in principal, with the amount of principal rising each year.
So the interest cost can be a wash with interest earnings, but you’re still short the principal payment. This is why many older people, with older mortgages down to a run time of 5, 10 or 15 years, can make the most difference in their cash flow by using savings to pay off the debt.
Paying off the debt also has a major side benefit: You won’t need to listen to product salespeople offering you great opportunities that aren’t so great because you won’t have the cash. Instead, you’ll have had the maximum direct impact on your life.
Another benefit for some people is a possible reduction in their income tax bill because avoiding the mortgage payments may mean that less of their Social Security benefits will be taxed.
Correction: The answer to Seattle reader M.A. in my August 17 column was incorrect. You can make withdrawals from any single qualified plan of a particular type to cover the required minimum withdrawals of all plans of that type. You can take a single RMD from multiple IRAs, multiple 401(k)s, or multiple 403(b)s, but you can’t take a single RMD from mixed types of qualified plans. The column incorrectly stated you could take a single RMD from all qualified plans.