Given my monthly letters have always addressed important broad financial topics, it seems to me that with the large economic issues facing the country, now would not be the time to stop. As I speak, we are up against the $30 Trillion dollar Federal debt ceiling limit, which should focus our minds like police lights flashing behind you when driving (it unfortunately doesn’t, but it should). 

Thus, today rather than address institutional asset returns, per se, I will address “income in retirement.” Specifically, I’m going to talk about Social Security because that income should be part of every hard-working American’s retirement future, but we’re currently screwing it up and better get it right.

The History of Social Security

To make you the hit at the next cocktail party, let me give you eight interesting historical trivia points:

1. Poverty caused by the Great Depression with millions of able-bodied out of work and widows dependent on “almshouses” gave rise to the national consciousness to that something had to be done. 
2. The real name is the Old-Age, Survivor’s and Disability Income plan (OASDI), and it’s still called exactly that but goes by the vernacular Social Security. (NOTE: Disability was not added until 1954.) The Committee initially formed to study this national “alternative to poorhouses” program didn’t have a name, but Congress called it Social Security Act and the name stuck. Legislation was passed in 1936, but the first benefits were not to be paid until 1940.
3. The program was really a social insurance program and so the taxes assessed were authorized by the Federal Insurance Contributions Act (FICA) of 1937.
4. Initial payments were NOT paid monthly, but a lump-sum payment. The first lump sum went to Earnest Ackerman, and he got 17 cents.
5. The way the program was designed, you could not collect a payment until you were 65 years old. In 1936, the average lifespan of a man was 62, so the program was actuarily sound (you conveniently died before you could collect).
6. The lowest Social Security number ever given went to Grace Dorothy Owen (New Hampshire). Ms. Owen received number 001-01-0001.
7. In 1940, the first monthly payment occurred. It was for $22.54 and went to Ida May Fuller (Vermont).
8. Ida May’s monthly check did not change for 10 years as there was no Cost-of-Living-Adjustment until legislation allowed it in 1950.
9. Health insurance coverage – called Medicare – was not part of the original program and only added as a benefit to those 65 and older in 1965.

How Social Security Works

Next, some very brief data on how Social Security works:

1. Social Security does not know how to think in annual terms, or annual payments. It ONLY thinks in monthly terms, in monthly payments.
2. You have to work (10 years’ time; 40 quarters) to qualify for Social Security. If you don’t work and have a Social Security number assigned to you, you can’t get benefits. Illegal / undocumented aliens CANNOT get Social Security.
3. Your benefit under Social Security is based on your wages for 35 years.  If you only work 20 years, then 15 of your “Average Indexed Monthly Earnings”(AIME) are entered as zero.
4. Social Security is the most progressively taxed system that exists on a Federal level because it’s intended to protect against abject poverty. Thus, it benefits lower wage earners more than top wage earners because it’s a “social program.” Something called “Bend Points” are involved in every computation, and lower earners get 90% of their monthly wage coming back to them as Social Security, a benefit which drops to 50% at the next bend, and the higher earners only get 10% benefit from their taxed earnings.
5. In 2023, you are taxed up to $160,200 in wages at a rate of 7.65%. Employers pay (match) your payment with another 7.65% so the total is 15.3% that goes in.
6. Everyone has a Full Retirement Age (FRA) based on their birthdate (somewhere between 65 -67). You can now take Social Security early, but you trim your benefits by 5% – 7% per year. If you don’t take your Social Security until after your FRA, you get an annual 8% increase until you do (maximizes at age 70).
7. “Spouses” were originally not part of Social Security payments, but later added to commit to a benefit of at least 50% of the primary wage-earner’s benefit. 

As of 2023, the average monthly Social Security payment is $1,827^[i]. The maximum at age 70 that can be received is $4,555^[ii]. 

What This Means for the Future of Social Security

All of this history and knowledge is necessary to set the context that we are doing an absolutely miserable job in managing a truly great program. It’s a great program if we love our fellow man, because as a society we should not have the heart to watch people suffer with no means to support themselves if they have previously worked. 

The program has people who think it should be richer in benefits and those who think it should be trimmed back.  It’s a compromise program: It was a compromise in the beginning and it is now.  Accept that fact. However, it is fiscally going broke and before we expand benefits as some want (“pay me more or start my Medicare coverage earlier”) or trim benefits (“means-test those who have a lot”), we need to do what the program was defined to do: pay people back who have worked and paid into the system. 

I’m a hard economics guy and heavy into accountability, and this is NOT a welfare program.  The fixes are needed because of one primary reason; Americans are living longer and the program hasn’t changed the tax rate being paid in since 1981. Does anyone ever partially believe that you can have current COLA-adjusted benefits with the underlying taxes to support them not having changed in over 40 years?? Politicians of both stripes avoid this topic like the Bubonic plague but they are seriously eroding the economic viability of our country because the current unfunded liability of these two programs is $60 Trillion – $100 Trillion^[iii].  I am personally appalled at the $30 Trillion in Federal debt, a figure itself that was an astounding 60% smaller just a mere 15-years back, but frankly, it’s chump change to the real conversation we should be having.

Taking Care of Our Societal Commitments

In conclusion, before we talk about increasing some benefit, or creating some new social program, or increasing taxes on or for something else, we need to be accountable and honest to OURSELVES and take care of the existing societal commitments we have made and that a loving society would do.  Everything else on budget discussions is offensive to the intellect, a violation of the truth, and an abandonment of the principles that made this country an economic success.  You deserve better.

It remains my deep and distinct honor to serve you well.

Patrick Zumbusch
Founder and CEO

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[i] “You May Be Shocked By the Average Social Security Benefit in 2023” (Christy Bieber, Motley Fool, December 3, 2022)

[ii] “What is the maximum Social Security retirement benefit payable?” (Social Security Administration Website)

[iii] “$96 Trillion in Unfunded U.S. Medicare and Social Security Benefits” (Adam Andrzejewski, Real Clear Policy, May 5, 2021)