For those of us who are 42 or younger, we have at least 20 years before we will be eligible for social security. I find it important to consider the future state of the program while I am still 20+ years away, because it impacts my financial planning. Here are some bullet points of my thoughts:
Social Security was never meant to be an income replacement in retirement. It was designed to keep old poor people from dying on the streets. It has grown into being a full income replacement for many and that’s unsustainable.
Benefits have been cut over time and will likely continue to be cut over time. The cost of living increases for social security do not actually track inflation and the age at which one can start collecting has gradually moved upward as well.
Life expectancies will likely continue to rise which makes the program less sustainable over time, but also more valuable to people who are older and grandfathered into certain benefits.
Generally, the government tends to cut benefits more for people who haven’t yet started to received them. For example, they might decide everyone born after 1990 has to wait until age 70 to start collecting but if you were born before then, you can still start at 67.
Means testing was first added to Social Security in the form of taxation of a portion of benefits. Such that if you have certain income levels, you pay taxes on your SS income.
It’s likely additional means testing will be a method to reduce benefits in the future.
Thus, my conclusion is to avoid having “means” by which can be tested in the future to reduce your SS benefits. We don’t know what those “means” will be, but some possibilities:
- Other federal retirement plan access
- Any state-level retirement plan access
- Income in general
- Assets in general
I hypothesize that in the future, SS will have to be pared down to only serve people who really need it, as was the original intention. My goal is to position myself into one of subjective need as defined by future legislation. Thus, I am trying to anticipate what this will look like. Let’s think about each possibility:
Republicans tend to have a voting base that is upper middle class to wealthy and work for private companies.
Democrats tend to have a voting base that is younger, minority, and also unionized workers.
Democrats would not support means testing on the basis of other pension plans because those groups are generally unionized. However, in 20+ years, there will not be many people with private pensions. All private “defined benefit” pensions have gone away in favor of defined contribution plans. So really it’s just state and federal government workers still getting a defined benefit plan and they are not all unionized, so I’m not sure which way democrats would swing.
Republicans would not support means testing based on IRAs and 401ks since that’s where most of their constituents stash away money. Annuities may also fall under this.
“Income” has already been means tested so there’s a precedent there already in place which makes it more likely this will be used in a greater extent in the future. Such as phasing out SS benefits based on income.
One possibility of means testing 401ks and IRAs would be looking at account value at the start of each calendar year, such that one must draw down all 401ks/IRAs to zero before being eligible for any SS. If this occurs, you’ll have a huge taxable implication on any tax-deferred money. Thus, this could be countered by preferentially using Roth accounts, since you could draw them all down in the first year to zero without tax consequences.
Means testing of State and Federal plans will be tricky to avoid. One possibility might be a lump sum payout, rather than taking your defined benefits, however if SS means testing becomes law, then individual states will block lump sum payouts since it would bankrupt their funds. I’ve been tracking several state retirement plans that I’ve lived in over the years and each state has changed their rules significantly over the last 15 years to block certain things. My assessment here is to avoid state or federal retirement plans if possible, and to take your lump sum payout and roll it into a privately held IRA as soon as possible before that is blocked.
Asset-based means testing seems unlikely. That’s a common tool for Medicaid and various welfare benefits, but would result in the greatest pushback and also increase overhead of the SS program significantly as everyone will have to submit annual asset documentation. It’s also relatively easy to change asset ownership as Medicaid planning shows, so my assessment is this is least likely and also easiest to circumvent should it arise.
Thus, it seems prudent to get out of retirement accounts and into hard assets if possible. Owning 3 single family homes (without a mortgage) that you rent out for monthly cash flow is better than having $1M in your 401k with respect to future SS means testing. You can always transfer the property title to a family member or a trust, and artificially reduce your means. Whereas taking $1M out of your 401k will result in a $300k+ tax bill.
I think gold and silver coins could also be good because while they are an asset, they are not listed anywhere, and if cash still exists in the future, there’s no income generated from the sale. I do foresee cash going away in the future, so I wouldn’t suggest a large percentage of your retirement fund stashed in gold coins because it might be difficult to liquidate in a way that hides the numbers from SS income-based means testing, which is the most likely form of means testing.
I’m a fan of early retirement, between the age of 40 and 50. In that case, you will have 10 to 20 years of living off your retirement accounts prior to being of SS age, and you can then draw down on your retirement funds during that time and prepare for the means testing to come.