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4Q19 Quarterly Letter

“Social Security is the oldest and most popular federal income support program, and after more than 80 years, it might seem as permanent as the pyramids. But the pharaohs did better long-range engineering than the architects of the New Deal did.”
EDITORIAL BOARD, "Social Security is running out of money and time," Chicago Tribune, July 19, 2017

When I write the Curran Wealth Management letter at the beginning of each New Year I always hope to communicate something that is memorable.  Memorable in the sense that it will help all of us to better understand challenges we all face with life expectancies that are extending our time on this earth into our 90’s and perhaps longer. 

My message for you is to depend on yourself to pay for your retirement and no one else.  For those of you who are older you have the luck to have been born earlier.  Social Security can still pay benefits to older persons based on rather slim contributions you made in your early years of working.  You may even be fortunate enough to receive a defined benefit [pension] check each month along with Social Security.  But do not forget many public pension funds are significantly underfunded and may need to be altered.  Altered means reduced future benefits.

The harsh truth is Social Security taxes are making it increasingly difficult for Americans to fund their personal retirements.  Social Security taxes are a major burden on working age people.  The benefits relative to their costs are minimal for all.

For those of you who are younger pay particular attention to my experience compared to what you face now and will face as you approach retirement.

Governments have done a poor job understanding what it means for Social Security benefits when people live longer while having fewer children.  Compounding the problem is the tendency to expand benefits without fully understanding future increased costs.  With more people promised benefits and fewer workers to pay, the challenge to sustain programs for retirees has become overwhelming.

When I began working after college I earned about $8,000.  My wife Peg earned about $7,000.  I was a recent graduate of the University of Pennsylvania’s Wharton School having earned an MBA.  Peggy graduated from Temple University with a BS in Education.  The year was 1969, and I was working in Albany, New York, as a Business Improvement Analyst in the NYS Department of Transportation.  Peg taught fourth grade in the Bethlehem Central School District. 

Keep in mind we had both recently graduated from college.  We were on track to receive the maximum Social Security benefit at our full retirement age of 66.  We did not know it at the time but that would have been $2,366 per month.  If delayed until age 70 the benefit would have been about $3,123 per month. 

So in our very first year of full time employment we were on track to receive a maximum Social Security benefit at our full retirement age of 66.

To actually receive the full retirement benefit would require at least 35 years of earnings in excess of the amount subject to Social Security tax. By 2011 [my full retirement age] the maximum taxable earnings subject to Social Security tax had risen to $106,800 and the rate was 5.7% plus Medicare of 1.45%.

Those beginning their working lives in 2020, would need to earn $137,700 in their first year of employment to qualify for the maximum Social Security benefit at their full retirement age of 67.  Keep in mind, to qualify for a maximum benefit, the worker must reach the threshold for earnings in 35 of their working years. 

I do not know many young workers whose careers promise a starting salary of $137,700.  In 1969 when my wife and I began our careers we reached maximum Social Security earnings at the entry level for New York employment and as a first year teacher.

The Medicare portion is based on all earnings.  There is no cap. As of January, 2013, individuals with earned income of more than $200,000 [$250,000 for married couples filing jointly] pay an additional 0.9% in Medicare taxes.  The amount in the table above does not include the 0.9%. Beginning in 1984, Medicare was charged on all earnings without a cap.

In 1969 the maximum I could have paid in Social Security taxes was $327.60.  My employer would have paid the same for my account. Today the maximum paid would be $10,534 on the Social Security earnings limit of $137,700.  The employer would pay the same.  
My full retirement annual benefit at age 66 was equal to $28,392.  It was 86.66 times my total Social Security tax in 1969.  If you pay the maximum Social Security tax today and received the same multiple of tax paid, your annual Social Security benefit would be $739,873. I am always saying you can only spend a dollar once.  It is also true that you can only invest a dollar one time.  When the money is spent for your retirement before you receive it, you have the right to expect a reasonable benefit.  Obviously it is not working.  Pay as you go is broken.  It needs major reform.

If the same dollars were invested in the stock markets that are taxed for Social Security, we would expect a much different result. Using the worst return for the S&P 500 over 35 years since the enactment of Social Security in 1935, a 25 year old would expect an $8,537 investment to grow to $441,476.  The 9.85% return assumes the worst case experience over 35 years since 1935.  If we add in the employer contribution the sum is doubled to $882,952. And that number is considering only one year of contributions out of 47 potential years.

We are a country that is built on investment and its success has made us the envy of the world.  It is too bad Government has failed us. The investment tenants that are so much a part of our success have been utterly ignored by people we elect.   


Clearly it is not happening.


Thomas J. Curran                    Kevin T. Curran, CFA
Chief Executive Officer &        President, CIO & Portfolio Manager

[1] https://www.ssa.gov/history/1960.html

 The material contained in this article is for educational and informational purposes only.  The information herein is considered to be obtained from reference sources deemed reliable, but no representation or warranty is made as to its accuracy or completeness.  This article is not, and should not be regarded as “investment advice” or construed as a “recommendation” or an offer to buy or sell a security.  The information contained in this article may not apply to your personal circumstances.  Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation.  Information on taxes is based on the tax laws existing at the time of publication.  Tax laws are subject to continual change.  In addition, tax laws vary by state.  This article is not, and should not be regarded as tax or legal advice.  We cannot ensure tax consequences of any transaction.  If you would like a detailed analysis of your tax situation, with specific tax recommendations, you can discuss the possibility of pursuing a formal relationship with Hippo Tax Services, LLC.