The 2032 Social Security Problem: What It Could Mean for Retirement Planning

Protecting and Preserving Wealth Episode 95 – The 2032 Problem

Speakers: Bruce Hosler, Jason Hosler, Alex Koury, & Jon Gay

[Intro Playing]

Jon Gay (00:04):

Welcome back to Protecting and Preserving Wealth. I am Jon Gay, joined by Bruce Hosler, Alex Koury, and Jason Hosler of Hosler Wealth Management. Always good to be with you guys.

Bruce Hosler (00:12):

Hello, Jon.

Jason Hosler (00:13):

Good to see you, Jon.

Alex Koury (00:14):

Good morning.

Jon Gay (00:15):

So, we’re talking about the 2032 problem. We’ve alluded to this in previous episodes of the podcast. Bruce, what is it?

Bruce Hosler (00:23):

It’s a challenge that the government has because the trustee reports are telling us that the Social Security Trust Fund is likely to run out of money in 2032.

And running out of money doesn’t mean there’s no money, it just means it’s insolvent. And we’ll talk about that because it’s a math problem. And the trustees report are projecting this depletion or insolvency, which means there’s still money coming in from payroll taxes, but it’s not enough to pay the full benefits.

So, if we look back to 1960, there were five workers that were supporting each social security income beneficiary. Today, that number’s down to three, and we expect in the short, near future that this is probably being closer to two workers for every beneficiary in the next few years.

And so, once the trust fund (there’s an extra trust fund). Once that goes to zero, now all the law requires is that you have to pay as you go. So, the payroll coming in from Jason and Alex working have to support me on my social security benefits, and I can’t get anything from the trust fund because the trust fund is empty.

Jon Gay (01:37):

So, two points I want to make here, Bruce. One, this is not saying your social security benefits go down to zero.

Bruce Hosler (01:42):

Correct. That is not what this is saying.

Jon Gay (01:44):

But the important point here is there’s a demographic shift, which is that there are more folks getting older and retiring and living longer, partly thanks to medical advances and things like that — there are more people on social security for longer, and that’s part of why we’re experiencing this issue, right?

Bruce Hosler (02:02):

Partly, and then also, because they haven’t solved the math. They had the problem back in the 1980s and they partially solved it, but they didn’t solve it all the way. So, they have not been charging enough for the trust fund to be large enough to take care of this problem.

So, it’s still okay right now today, but in 2032, that’s when they calculate ,the trustees do, that we’re going to run into this wall.

Jason Hosler (02:26):

The fact that people would still be getting roughly 77 to 81% of scheduled benefits, it wouldn’t be the end of the world or the end of the program, but that could still make a drastic difference in individuals’ lives, their lifestyles, and it could have a pretty large aggregate effect across the economy because a lot of that social security transfer money ends up being spent in the economy.

But they’re going to do something to address this because recipients of social security are probably the most dependable voting bloc in the country. They probably won’t take any action until their hand is forced to. It’ll be very interesting to see what will be done.

One of the proposals that we already saw back in 2022 during the Biden administration was to raise the taxable wage base. And the proposal back then was to raise that cap from currently where it’s at to about $400,000. And that would probably be enough to fund social security on an ongoing basis, but it is probably going to be a combination of other things. They might have a cost-of-living adjustment change in how they calculate that. They could add a higher-

Bruce Hosler (03:42):

Well, slow down there, Jason. Slow down there. So, let’s just talk about that: cost of living adjustment, that’s that COLA. So, cost of living adjustment every year. Right now, it’s tied to the CPI.

Jon Gay (03:54):

Consumer price index.

Bruce Hosler (03:56):

Yeah, the consumer price index. They could make that so there’s no COLA on it, and that it’s just flat or that it’s on some other index. So, that’s a big deal because these retirees, our clients are used to getting that 1, 2, 3% every year on their social security benefits and the cost of medical and the cost of food and the cost of gas is all going up, and their social security could be flat.

Jon Gay (04:20):

You mentioned the social security being flat, Bruce. So, obviously, not having the cost-of-living adjustment would be important, but I also think about folks at the other end of the economic spectrum that are living on their social security checks.

As Jason said a few minutes ago, if they’re only getting 75, 80% of almost their total income- if they’re living largely off their social security- yes, Jason, they will have fewer money to put into the economy, but they also have less money to put food in their mouths, food on the table, gas in the car, whatever it is. So, you can see the huge economic ripple effect here.

Jason Hosler (04:52):

That’s exactly right. There would be a huge economic ripple effect. And I think the seriousness of the issue is why there will be some way somehow a congressional attempt to manage this. The higher retirement age, for example, what we’ve seen in past with changes to social security most recently, what was that? Around 2018, 2019 — they changed the claiming strategies.

And what they did was everyone born after 1960 going forward, they had to follow the new rules. Everyone born before was grandfathered in. So, if they did introduce a new higher retirement age, probably somewhere around age 50 or so, those workers get locked into the old system and the new higher ages would apply to everyone that’s younger.

Jon Gay (05:45):

So, we’re talking about having folks not collect the social security till an older age. And then also, as you mentioned a moment ago, more wages being taxed for social security said up to the $400,000. Now, once you hit a ceiling, you can’t have any more taken out for social security. You’re talking about taking out more as you make more money, and those are some strategies here.

Jason Hosler (06:06):

And in the end, there’s only three levers that the government can pull because this is all connected to their debt problem. They can decrease spending, they can increase revenue and taxes, or they can inflate the difference.

Bruce Hosler (06:19):

Or a combination.

Jason Hosler (06:20):

Probably a combination of all three of those. So, decreasing the benefits that they pay, that’s raising the age at which you could claim Social Security. Raising taxes, increasing the Social Security wage base. And if that still doesn’t balance the budget, which I don’t expect that we’re going to have a balanced budget in this country anytime soon, they’re going to print the difference.

Bruce Hosler (06:41):

Well, so they’re going to deflate the dollars, what you’re saying.

Jason Hosler (06:43):

Yes.

Bruce Hosler (06:43):

An important point I don’t want to pass here is Congress does not want to be in office when this Social Security car running at a hundred miles an hour hits the wall in 2032. It’s going to be an explosion of extraordinary size, but they are going to delay dealing with this.

Can you imagine if you’re a politician that’s voting to raise their taxes or cut their benefits on Social Security? You are not a popular character. So, it’s probably going to be pushed off until the last second between 2030 and 2032. Although we see that there’s some actions in Congress that are starting to take place, and we’ll talk about that in our next podcast that affect this.

Alex, we want our clients to be looking at this. Certainly, the tax bomb of raising the salary, that’s subject to social security to $400,000 during the Biden administration, that did not pass, but there could be a donut hole where they leave the current income subject to it, and then at 400,000 and above, they start charging that again for the really wealthy people.

And there’s a feeling of let’s tax the wealthy right now. Alex, let’s talk to our clients about some of the things they can consider doing to get a bigger benefit from social security. And the first one is showing them on how to increase their benefits. How do they do that?

Alex Koury (08:15):

The first and most important thing is — and this is something that a lot of folks don’t get a lot of guidance around or they just automatically think, “Well, when I turn 62 years old, I’m going to start applying for my benefits because I’m scared that there’s not going to be any benefits when I turn full retirement age at 67 or even at age 70 at the full retirement benefit.”

And it’s especially important when you have a spouse who maybe didn’t earn as much as you and you’re older as well to really understand what the benefit is of waiting to take your benefits until the last possible moment, at age 70, to maximize the benefits over not just your lifetime, but also over the lifetime of your spouse who’s going to likely inherit a higher benefit at some point in the future.

So, when you look at the maximum cumulative effect of the total potential benefits over your lifetime, that number makes a bigger difference than just looking at the year over year number where it doesn’t really seem like it makes a lot of sense to wait a little bit longer.

Cumulative benefits do certainly count as well. So, what we do with our clients, we look at the full financial plan to say, “Hey, if I have enough money in my IRAs or brokerage accounts or other things like life insurance policies, can I bridge the gap between my retirement age and let’s say, maximizing at age 70, in order to really maintain or maximize your full benefits?” That’s the first thing that we look to do.

Bruce Hosler (09:37):

So, we want to put these contingency plans in place. Jason, when we look at … we work with clients to help the impact of this, what do we think about clients that are over the age 60? I don’t think they’re probably going to have their benefits affected at all in this because it would be such an uproar for Congress to do that.

But what about other ages of our clients, like clients that are between age 50 and 60 and clients that are under age 40? What’s likely to happen to them? We don’t know for sure. We’re not prognosticators, but what do we see from what we see that’s been written?

Jason Hosler (10:16):

Well, as planners, we like to look at the whole range of possible outcomes, right? And so, when we have a financial plan, we run stress tests. What happens if the market’s going to drop? What happens if we have much higher inflation for your whole retirement? We look at all those types of things.

So, for our clients who have already claimed Social Security, maybe they’re in their 70s, we would look in the retirement plan at them receiving the full projected Social Security payment, but then we also run it with only receiving 77% of those benefits and we compare the two. Are you still going to be okay if you receive this cut in Social Security? Would we need to make any adjustments to your lifestyle?

For clients who haven’t claimed Social Security and maybe are approaching that, we have the conversation about their own personal situation, their health and life expectancies, the genetics that they have.

We look and have a conversation about the stability of the US government, but that conversation, I will always remind them of the story of the Romanian pensions. Even though we are coming up on 30 years post the fall of the Soviet Union, those Romanian old Soviet pensions are still being paid because they needed that for the political stability. I don’t think there’s any way in this country that social security ever goes away completely.

Now, that being said, if you’re young enough, say 50 to 60, maybe you should plan on not being able to claim quite as early. And if you’re younger than 40, I would be planning on less benefits in my plan.

Bruce Hosler (11:47):

As the author of Moving to Tax-Free, I cannot leave the moment in time that we sit right here on August 25th, 2026. Last week, the country crossed over the $40 trillion in debt.

Jon Gay (12:03):

Yikes.

Bruce Hosler (12:04):

Now, that’s different than the Social Security Trust Fund, but it’s a tell that our country is having a challenge on having enough revenues to pay all of the spending that they’re doing. And so, this whole idea of moving to tax-free is on purpose because we worry about provisional income.

Now, Alex, I want you to talk about the taxation of provisional income. That’s the calculation, folks, that the social security and the IRS uses to determine the taxability of your social security. And if you can keep your taxable income (I didn’t say your income) below those thresholds, you don’t actually have to pay taxes on your social security. Alex, talk to our listeners about that a little bit.

Alex Koury (12:46):

First of all, we need to understand what inputs go into counting as provisional income. So, we think about things such as your wages from your employer, you think about taxable interest from bank accounts, dividends, interest from other instruments like fixed income. You take a look at as well, municipal bond interest.

So, folks that have municipal bonds in their portfolios that generate tax-free income, in one sense, it is a tax-free move. However, that interest actually counts against getting … actually adds into your provisional income number to figure more income you would have to report. And then the other big piece is one half of your social security benefits.

So, adding all that up together, you can see that with the provisional levels of what they are today, $25,000 to $32,000 for an individual, up to $46,000 for a married couple, those are very, very low limits today in today’s terms.

So, how do we figure creating more tax-free income that’s not provisional income to keep as low as possible, and also keep your social security benefits hopefully non-taxable as well?

Bruce Hosler (13:55):

Excellent. So, clients that want to delay their claiming to age 70 to get the bigger payout, we advise them to do that if they can afford to do that, just like Jason mentioned earlier, to let that surviving spouse get a bigger payout over his or her lifetime.

And certainly, we want to do planning to provide this income that they may need before they get to age 70. So, if you’re at 65 and you’re trying to claim social security, and then you got to get to age 70 before you get to your social security benefits because you delayed them, now you retired, but you’re claiming Medicare, but you don’t have the income, so you’ve got to burn up some of your retired income and you worry about sequence of return risk.

We want to use an income ladder that provides safe, secure income in there, but we want to plan for that longer delay before you claim social security. The breakeven, as we’ve calculated that, Jason, is usually between age 79 and 81- of claiming at full retirement age at 67 to waiting and taking it later. So, folks, most of you are going to live to 81. So, it’s going to be worthwhile for you to delay claiming benefits, most likely until age 70.

Now, one of the things that’s kind of coming up all of a sudden is business owners and their risk as an employer, because what if the government changes not only the employee side, but the employers that have to withhold more, now they’re literally having to pay more, Alex, right?

Alex Koury (15:38):

That’s right. I mean, so there’s a ripple effect you can see here across the board in terms of just how big of a problem this really is. It’s not just a personal problem, which primarily it is, but think about how you manage your business today.

I mean, if those taxes go higher on you, how does that affect wages, be able to expand your business, all those other things, right? So, there’s many, many layers that this goes deeper, and that’s why it’s just important to be aware of these potential changes and how it can affect you.

Bruce Hosler (16:08):

When we talk about the resolution of this, it seems like it’s not going to be all done at once. It’s probably going to be kind of like updating your computer security. You have to keep downloading updates and that.

Jon Gay (16:23):

And those updates always come in at the worst possible time.

Bruce Hosler (16:26):

Yes, absolutely like that. But it’s going to be a fix that may be in parts, and they may get some of it done, but not all of it and have to come back. We don’t know exactly how this is going to develop, but we do know this: if they do not make any changes, people are likely to have to take a 22% cut in their social security benefits.

And for those people on the lower end of the spectrum that’s just living on social security, that could be very devastating. And for those in the middle that maybe they still rely on it, it’s not the end of the world, it still doesn’t mean that it won’t be painful.

So, we have a few years here that we’re trying to talk to our listeners and prepare you for looking at the options that you should plan around the inevitability of either some increase in taxes, some lowering of some benefits, or some combination of two of those together. And you should have planning options that are developed.

Jason and Alex, both of you take a minute. We use RightCapital for the planning. We can give optionality and let clients see, hey, what if Social Security gets cut? What does that do to your planning? Maybe explain some items and some thoughts you have on this as we close up.

Jason Hosler (17:38):

Yes, I think that Social Security is a very important part of the mix for anyone’s retirement income planning. You want to take both the qualitative and quantitative approach, look at your own personal situation, and then you want to implement a strategy that is going to maximize what’s important to you, whether that is having enough income for a surviving spouse that you’re leaving behind, making sure that you get as much out of the government as possible — whatever it is, we want to make sure we do the planning to help you accomplish your goal.

Alex Koury (18:10):

Yeah. Additionally, it’s just to prove, I mean, ideally you don’t want to have to rely solely on social security or even as a major part of your plan. So, again, planning for those contingencies about where else would you get income from? How do you create a bucketing strategy for your financial plan or retirement planning that says, “Hey, I’ll have enough income even if benefits are cut in a certain way that I can shift towards that safe bucket, but still allow enough money in your longer-term bucket to fight inflation and cost of living adjustments for the future.”

That’s what we work with our clients on. So, it’s about understanding what’s available or how these things could affect your plan, but again, not making specific decisions about that because we don’t know what’s going to happen by 2032. We know where it’s headed towards at this point, but no decisions have really officially been made on cuts or not, but you want to plan for potentially the worst, right? Plan for the worst and hope for the best.

Jon Gay (19:03):

Yeah, you’ve all hit on it throughout this episode that you want to have a plan that you can stress test, that you want to work with a professional on. And if our listeners want to talk to you at Hosler Wealth Management, what are the best ways to find you?

Bruce Hosler (19:14):

Well, certainly on the website hoslerwm.com, they can catch us there. In Prescott, Jason?

Jason Hosler (19:20):

Give us a call at 928-778-7666.

Bruce Hosler (19:26):

And in Scottsdale, Alex, how do they get ahold of you?

Alex Koury (19:28):

480-994-7342.

Jon Gay (19:32):

Alright. Great work, guys. I’m going to go do this Windows update and I’ll talk to you in a couple weeks.

Bruce Hosler (19:37):

Alright. Jon, thanks.

Alex Koury (19:38):

Bye-bye, Jon.

[Outro Playing]

Disclosure:

Investment advisory services are offered through Mutual Advisors LLC, DBA Hosler Wealth Management, a SEC registered investment advisor. Securities are offered through Mutual Securities, Inc., a member FINRA/SIPC. Mutual Advisors, LLC and Mutual Securities, Inc. (collectively Mutual Group) are affiliated companies.

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