Last week we wrote about Social Security Full Retirement Age (FRA), and today we are expanding on that topic. Full Retirement Age (FRA) is a moving target, depending on your year of birth. FRA currently ranges from age 65 to age 67, and is easily found by going to the Social Security website (ssga.gov). As we pointed out last week, people born before 1938 reached FRA upon their 65th birthdays. For later birth years, the FRA scale moves up in increments until birth years 1960 and later, where it reaches the maximum FRA of 67.
For generations, FRA was 65, and for “good” reason; most people didn’t live long. As strange as that may sound, the Social Security System was not designed to be a retirement income system. Rather, it was a “safety net” for those who defied the odds and lived well past average life expectancy. Since Social Security is an insurance-based system, and not a classic welfare system, it has been accepted as an integral part of the fabric of American society.
Many times you have heard and read from me that the design of the Social Security System is brilliant. Mostly. It has one major design flaw – it is running out of money. The original designers failed to foresee a few important societal changes:
- A steady increase in life expectancy resulted in people receiving benefits longer than expected
- Following the end of the Baby Boom, people began to have fewer children, so incoming funds were less than anticipated
- For decades, payments into the system exceeded outflow of benefits, so a Trust Fund was building to help the first 2 problems, but along the way, Congress spent the money and replaced it with IOUs
Politicians have repeatedly failed to address the problem, and in fact made it worse by tapping the Fund. Adding insult to injury, Social Security added many more benefit recipients, with no adequate additional funding mechanism. Disability recipients and dependents of deceased parents now take a toll on the System.
After spending the Trust Fund, the System became a “pay-as-you-go” Plan. In the private sector this is generally called a “Ponzi Scheme.” In government, it is called a self-financing system. It is not. Ponzi is much closer to the truth.
Like all large-scale social systems, Social Security was designed to accommodate our society through a steadily-growing population of workers. These people pay into Social Security on a daily basis, and the money they contribute is paid to people receiving benefits. Unfortunately, the new money does not fully cover the outflow, rendering the System on a collision course with bankruptcy.
In a nutshell, changes are coming to Social Security, like it or not. Prepare for them, and you will be fine. Ignore the inevitable, and you will be unhappy and dependent. Later retirement ages, higher withholding tax rates, and even reduced benefits are inevitable. No Congress and President since the Reagan years has had the courage to address the situation. They must do so, and soon.
In the next few weeks, we will be covering more and more details about Social Security. Our efforts are aimed at teaching people about options existing within the System, and how to plan for their own personal best ways to collect.
Van Wie Financial is fee-only. For a reason.
