by Dennis Miller
When it comes to annuities, I lean on my friend, and renowned expert, Stan the Annuity Man. He’s told me many times, “Social Security is the best annuity on the planet.” Stan cites two primary reasons why he feels that way. The federal government guarantees Social Security. Social Security mandates Cost of Living Increases (COLA) automatically. While that may be true today, it’s inevitable things are going to change. In late 2016, Yahoo Finance published the First Draft of the GOP’s Plan to Overhaul Social Security.
Here are some highlights:
- Gradually increasing the retirement age for full benefits from age 67 to 69.
- Adopting a less generous Cost of Living Adjustment (COLA) Formula.
- Means testing, reducing benefit payments to wealthier retirees.
- Eliminate COLA increases for wealthier individuals.
- Increase the minimum benefit for lower-income workers.
The article summarizes, “(This) proposal … is little more than an opening bid in a much larger conversation about entitlement reform (Emphasis mine) in the coming year.”
Both political parties agree that Social Security benefits must be cut and taxes increased. Unlike an annuity with a private insurance company, Social Security has no contractual guarantees. It is nothing more than a promise – that’s impossible for the government to keep. It’s now an entitlement program, which means redistribution of wealth!
How good is the guarantee (promise) from the federal government? From 2009-2016, total US Government Debt has roughly doubled to $20 trillion dollars. If a private insurance company lost $10 trillion over the last eight years they would have been in bankruptcy long ago. What separates the US government from a private insurance company? They have the ability to borrow trillions of dollars and create money out of thin air.
There is a “Social Security Trust Fund” which many feel has been raided. While there may be a fund, allegedly $2.6 trillion, it consists of Treasury IOU’s. It was great for the government when the amount of social security taxes collected exceeded benefits being paid. Today, baby boomers are retiring at a rate of 10,000 per day and the situation is reversed. They estimate by 2032 the trust fund will be depleted.
The Heritage Foundation explains it well and includes the following graphic:
The government must borrow money to make up the difference. This is in addition to the normal government borrowing to support significant deficit spending. The government cannot afford to continue to kick the can down the road much longer.
While no one knows what the final outcome will be, historically governments use high inflation to repay those debts with cheapened dollars. Higher taxes, moving back the retirement date, means testing, reducing and eliminating COLA will all be on the negotiation table. Americans will be inundated with great political melodrama, and all generations will bear some of the economic burden.
When my grandson asked, here is how I explained, “the greatest annuity on the planet”.
Young people today must understand what Social Security is, and is not. A portion of their salary will be taxed, with a government promise to pay them benefits for their lifetime once they retire. How much those benefits will be, when they can retire, and the correlation of benefits to their personal wealth is undetermined.
Workers will probably get something; however it’s likely the promises will be modified many times. The government will jerk them around like The Wild Mouse roller coaster before the end of their ride. Benefits are nothing more than political promises.
Once you retire, if the COLA formula is changed or eliminated, your most valuable Social Security check will be your first one. A government imposed inflation cap guarantees your Social Security check will lose buying power every month. As you move further into retirement, you are going to need to draw on other retirement funds to continue to be able to pay your bills.
Is Social Security the best annuity on the planet?
Who knows? Even if it is, it’s far from perfect. It is not contractually guaranteed like an annuity with a private insurance company. It is a promise than can be changed by politicians, who do so regularly.
All generations of Americans should recognize it for what it is. Social Security is a form of a deferred annuity, which is mandatory for most workers. It should be factored in as one element of a solid retirement portfolio. That portfolio must also include other sources of “guaranteed” income. It should also include assets that historically grow ahead of the rate of inflation.
Retirees need “income certainty” – having enough money to pay the bills regardless of what happens in the markets, inflation increases or any other unexpected economic changes – without having to worry. Should means testing and reduced COLA adjustments become part of the revision, income certainty will be replaced with worry. Retirees can depend on the government to send them something every month, but they cannot depend on it to continue to pay all the bills it may have covered in the past.