Q. My husband and I are in our late forties. We are saving for retirement with the assumption that social security will be bankrupt by the time we retire. We are not planning on receiving anything. We don’t feel we should rely on Social Security benefits to support ourselves. We hope to be happily surprised if we are wrong. Your financial calculations in a recent column rely on Social Security providing a large portion of retirement income for most people, yet I thought you have said in other columns that this is a tenuous source of future support. Can you clarify this for me? —A.S., Austin, TX
A. Many people, perhaps most, have an “all-or-none” attitude toward Social Security. They either assume that everything is wonderful and they are heading for a bed of roses. Or they assume that the program won’t exist. Reality has much finer calibration and isn’t all-or-none.
Unlike Medicare, Social Security is nearly self-supporting. Indeed, until recently, the revenue from the employment tax was significantly greater than the benefits distributed and the cost of running the program. That’s why the program has a $2.7 trillion trust fund. The “asset” supporting the value of that trust fund is a collective you and me— the ability (and willingness) of workers to pay higher taxes.
But even if there is no willingness or ability to pay higher taxes, current revenue under current law will support about 75 percent of promised benefits when the trust fund is depleted in about 20 years. Between now and then, a combination of the revenue and redemption of trust fund assets will cover all promised benefits.
How much anyone will receive in Social Security benefits depends on their reported income and how many years they work. A low-income worker, for instance, can expect Social Security to replace more than 60 percent of income. But a worker at the top of the wage scale— someone earning $117,000 this year— can only expect Social Security to replace about 24 percent of that $117,000 at full retirement age. In both cases, the replacement amount will be less if the worker retires before full retirement age (66), and more if retirement is delayed.
So high income workers— the 6 percent who earn more than $117,000 a year— need to save more than the other 94 percent because Social Security benefits are capped at the wage-base maximum. Another implication is that higher income workers will be less vulnerable to cuts in Social Security benefits because they receive a smaller proportion of their retirement income from the program.
None of this means it is reasonable for anyone, regardless of income, to dismiss the value of Social Security benefits. Reader mail indicates that an increasing number of dual income/ higher income couples are retiring with Social Security benefits that total as much as $50,000 a year.
Q. I am 62. I am on disability from cancer. Social Security disability pays my living expenses. I also have a trust worth about $400,000 and about $200,000 in IRAs. Both are with a bank wealth management firm that charges 1 percent a year, or $6,000 to $7,000 annually.
Index funds have a better investment return and charge a much lower management fee. I am thinking of moving all my money to Vanguard index funds, although there is a tax penalty of about $9,400 to sell and reinvest the trust money. Obviously the IRAs can roll over.
Does this sound like the best way to go? I am trying to increase the trust for my daughters when I am gone. —E. O., by email
A. If the unrealized capital gains were large and you were certain of a short life, keeping your current arrangement would make more sense. But that $9,400 in costs is only 2.4 percent of your $400,000. It will be recouped in lower expenses in well under 3 years; so making expense-cutting changes is a good idea— IF you can change the manager of the trust. That may be a big “if.”