Michael Finke, The American College of Financial Services Professor and Frank M. Engle Chair of Economic Security, and Robert Powell, TheStreet’s Retirement Daily Editor and Publisher and finStream.tv Co-Founder join Yahoo Finance Live to discuss the state of the U.S. Social Security program, how Americans are working longer, the bipartisan divide, the retirement age, and misconceptions and uncertainties surrounding Social Security.
When you work, you pay your taxes into Social Security. The Social Security Administration, or SSA, uses your tax money to pay out benefits to four groups of people-- people who have already retired, people without qualifying disabilities, survivors of workers who died, and, lastly, dependents of beneficiaries. Your money goes to pay for people who are getting benefits right now.
If you're an over that $162,000 here, you will not pay any more Social Security taxes. Eventually, when it is time for you to claim your benefits, you will receive money from the taxes younger workers are then paying. In the US, you can start claiming your Social Security benefits at the age of 62. However, your full retirement age may be age 66 or older. And waiting to claim benefits until later age, well, that means that you receive more money. Social Security can be difficult to discuss because it does have a financing problem. And the solutions, they do not please everybody.
- [INAUDIBLE]
ROBERT POWELL: I'll defer to the professor, though.
- OK, Bob--
MICHAEL FINKE: Very impressed.
- We'll start with you, Bob. How dire is the situation at the moment when it comes to our Social Security?
ROBERT POWELL: Well, it's not urgent that we act now. But I think it's urgent that we start debating the possible solutions now. Because 10 years will come rather quickly. And if we don't come up with a solution, then it will become very dire.
But I think the problem right now is that for most lawmakers, this is an issue that they don't want to touch. Because none of the solutions are great, right? They're either cutting benefits or increasing taxes or a combination thereof.
SEANA SMITH: Well, Michael, before we get into these possible solutions and some of the politics at play here, how is this going to affect how long we work? And especially for younger Americans right now when they're looking at their parents, is it pretty much a guarantee that the younger generations are going to be working longer than the older generations right now?
MICHAEL FINKE: Well, I would say it's pretty much a guarantee. And I would also say that they should and that that's fair. So we have gained in the United States about a year every decade in longevity after the age of 65.
What that means is that younger people today can expect to live longer in retirement. They're going to receive more years of Social Security income benefits. For them, it does make sense that our retirement age should be extended as longevity increases over time.
That is fair. It may not seem fair because other people can retire when they're younger who are older than, say, millennials are right now. But it is fair in terms of equalizing the amount of time that we can expect to spend in retirement.
- I think, frankly, we've learned that working a lot later is actually good for you and good for the ticker, but that's for a whole other subject. Bob, the politics of this are just, they're complicated. Because nobody wants to touch it. And we got a reminder at the State of the Union just how hot a potato this is when it was addressed by President Biden. Let's listen to that interaction.
JOE BIDEN: Instead of making the wealthy pay their fair share, some Republicans, some Republicans want Medicare and Social Security to sunset. I'm not saying it's a majority.
[BOOING]
JOE BIDEN: Let me give you, anybody who doubts it, contact my office.
So, folks, as we all apparently agree, Social Security and Medicare is off the books now, right? They're not going to be cut? All right.
[CHEERING]
- Not entirely clear if President Biden had that planned out that well. It was a master stroke in the end. But, Bob, what does that tell you about the politics of the moment regarding Social Security?
ROBERT POWELL: The politics of the moment is that it's an untouchable subject. It's a third rail subject. And so I think both Democrats and Republicans aren't necessarily going to propose anything going forward.
But I think someone, there has to be some will, some desire on the part of-- and it has to be, I think, bipartisan. And much like we did back in the early 1980s, we have to come up with a solution that maybe affects people down the road in terms of decades from now. And I think that will be a reasonable thing to start doing now is to say, how do we protect Social Security benefits for the people who need it most?
And the people who need it most are, at the moment, largely those in the lowest income quintiles. And the people that maybe need it the least are those in the highest income quintile. So perhaps there's a way to, again, increase taxes in some way and reduce benefits in another or a combination thereof that would allow us to make Social Security what it was intended to be, which is a safety net and a social insurance program.
SEANA SMITH: Michael, what about you? When it comes to the politics of this, clearly a very divisive issue, especially inside the Beltway. What do you think needs to happen or is necessary at this point in order for us to make sure that Social Security is still something that's going to be here and at 100% in 30, 40 years from now?
MICHAEL FINKE: Well, I agree with Bob that it has to be a bipartisan solution. And, actually, I am reassured that there are some political candidates now that are saying some things that maybe a few years ago seemed like no politician would ever say, which is acknowledging the reality that we may have to extend the full retirement age to make Social Security more solvent. I think some of the language is still incorrect. People are still saying things like Social Security is going to go bankrupt, people are not going to get their benefits. Well, they are.
It's just they're going to get reduced benefits. So let's talk about how we make these trade-offs between taxing people more and decreasing people's benefits. Because that's what it means when we increase the retirement age. It means that we're decreasing people's benefits. It's just another way to do it. But as Bob said, there is going to have to be some combination of increased taxes or reduced benefits to give the American people what has been promised to them.
And to the extent that we can start moving forward quickly, the pain is actually going to be less if we can solve this in the next couple of years or come up with some kind of a solution as opposed to waiting until we're on the precipice of that 20% cut. Because nobody wants to see that. Nobody's going to get re-elected if Social Security gets cut by 20% or more.
SEANA SMITH: All right, well, Michael and Bob, we want to do something a little bit different here. We're going to play a game. And it's called "Myth or Matter of Fact." And we bring this up because there's a lot out there that's misunderstood when it comes to Social Security. So we're going to give you guys a statement on Social Security. You have 20 seconds to reveal whether or not it's a myth or if it's a fact and why.
So, Bob, we're going to start with you. Then Michael, we'll ask you another question here. But, Bob, myth or fact? Social Security will go broke soon.
ROBERT POWELL: Well, Michael just sort of hinted it at a second ago. The trust fund will have a deficit come 2034. And beneficiaries at that point will receive 77% of their scheduled benefits. So it's a myth that it's going broke. But it's a fact that there will be a shortfall.
- OK, Michael, myth or fact, Social Security benefits keep up with inflation?
MICHAEL FINKE: Well, you know, that is a little bit of both. So they do keep up with inflation in the sense that there is an inflation adjustment to Social Security. But it's been argued that inflation adjustment is maybe a little bit too generous. Because Social Security recipients can be a little bit more flexible about their spending compared to workers. If the price of gas goes up, then workers have to pay it to get to work. But the retirees can be a little bit more flexible and go on fewer driving vacations.
[BUZZER]
So yes, it does keep up with inflation, but maybe even a little bit more. And I think this may be one of those areas where we might see a potential cut.
SEANA SMITH: All right, we've got to keep the ball rolling here, Bob, myth or fact? Full Social Security benefits start at the age of 65.
ROBERT POWELL: Well, you gave this away earlier in the program. It does not begin at 65. Medicare begins at 65. But for Social Security, those born between '43 and '54 at 66, between '55 and '69 it's 66 and some months, and then for those born in 1960 and after, it's age 67.
- And finally, Michael, myth or fact, you can work and get benefits at the same time?
MICHAEL FINKE: Well, you can, but your benefits are reduced if you work-- if you take Social Security before full retirement age. So know when your full retirement age is. For me, it's 67. Anybody born after 1960, we reach full retirement age at 67. And if we continue to work and earn money above a threshold-- [BUZZER] and that threshold is about $22,000-- then we are taxed-- we have our Social Security benefits reduced by $1 for every $2 we earn.
- Touché. Nice job, Bob. And Michael, we appreciate you both. Job well done both. Good sports as well.