Michael Johnston, CFA of WealthChannel and show host Gene Tunny dissect the pressing issues facing the US Social Security system. Amid predictions of future insolvency, they discuss the demographic trends, financial realities, and policy adjustments needed to safeguard retirement incomes for generations to come.
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About this episode’s guest: Michael Johnston, CFA
Michael Johnston, CFA is a financial industry veteran with a passion for improving outcomes for retail investors.
Following stints in corporate finance and investment banking, Michael founded ETF Database (ETFdb) and grew it into the largest independent media property covering exchange-traded funds (ETFs). Under Michael’s leadership, the company achieved a commanding position within the ETF industry and played a key role in the “low cost revolution” that saw hundreds of billions of dollars flow from expensive mutual funds to low cost ETFs.
ETFdb is now a part of TSX Group, a publicly-traded financial services company that operates the Toronto Stock Exchange.
Michael co-founded WealthChannel with a mission of helping investors achieve financial independence by radically simplifying retirement planning and investing. Michael is responsible for WealthChannel’s content and education initiatives, including its flagship WealthChannel Academy.
Michael graduated from the University of Notre Dame with a degree in finance, and now resides in Oregon with his wife and son. He is active in his community as a member of the Board of Directors of the Lane Regional Air Protection Agency (LRAPA) and a volunteer at Hosea Youth Services.
What’s covered in EP233
- [00:02:59] Sustainability of Social Security.
- [00:03:52] Retirement crisis in America.
- [00:09:43] Americans living longer.
- [00:13:25] Social Security trust fund depletion.
- [00:17:38] Social Security sustainability.
- [00:18:59] Social Security Funding Solutions.
- [00:24:36] Frankenstein policy solutions.
- [00:27:50] Immigration and Social Security.
- [00:30:46] Retirement age and social security.
- [00:35:54] Retirement savings statistics.
- [00:38:19] Retirement and financial literacy.
- [00:41:26] Retirement savings options in the States.
- [00:45:02] Social Security explained.
- [00:50:26] Social Security and retirement accounts.
Takeaways
- Social Security Sustainability: The Social Security program in the US faces sustainability challenges due to changing demographics and financial dynamics.
- Retirement Crisis: There is a retirement crisis in the US, with nearly half of Americans having no retirement savings and relying heavily on Social Security for income in retirement.
- Potential Solutions: Various solutions were discussed, including raising the retirement age, adjusting cost-of-living adjustments, and increasing taxes to shore up the system.
- Individual Retirement Accounts: The US offers tax-effective retirement savings options like 401(k)s and Roth IRAs, but many Americans are not effectively using these tools.
Comparison with Other Countries: The discussion highlighted differences in retirement systems between the US and countries like Australia, where superannuation accounts play a significant role in retirement planning.
Links relevant to the conversation
- Michael Johnston’s bio: https://wealthchannel.com/about/michael-johnston/
- Wealth Channel Academy, Michael Johnston’s initiative to demystify retirement planning: https://wealthchannel.com
- Lumo Coffee, sponsor of the episode offering antioxidant-rich coffee: https://lumocoffee.com
- Social Security Administration: https://www.ssa.gov/
- Millions of Americans nearing retirement age with no savings – CBS News: https://www.cbsnews.com/news/millions-of-americans-nearing-retirement-age-no-savings/
- EP87 – Saving & investing for retirement: 401(k)s, IRAs, mutual funds, ETFs, etc: https://economicsexplored.com/2021/05/15/ep87-saving-investing-for-retirement-401ks-iras-mutual-funds-etfs-etc/
Lumo Coffee promotion
Lumo Coffee Discount: Visit Lumo Coffee (lumocoffee.com) and use code EXPLORED20 for a 20% discount until April 30, 2024.
Transcript: America’s Retirement Crisis: The Pressing Need to Address Social Security’s Financial Woes – EP233
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Michael Johnston 00:04
It seems as if the entire system is going to collapse, it’s still gonna be you know, it’s still gonna be generating. Like I said, 2033 will be the best year ever in terms of inflows into Social Security. The problem is that the outflows are also going to be at their their highest level ever.
Gene Tunny 00:24
Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning into the show. My guest this episode is Michael Johnston, who has a strong track record and corporate finance and investment banking. Michael co founder at ETF database and latent wealth channel. At wealth channel he has dedicated himself to demystifying Retirement Planning and Investment. In this episode, we dive deep into the intricacies of the US retirement income system, focusing on the Social Security programmes sustainability challenges. Michael sheds light on the pressing issues confronting this critical component of American retirement planning, and explores potential pathways to ensure its viability for future generations. This episode of Economics Explored is brought to you by Lumo coffee, which has three times the healthy antioxidants of regular coffee Lumo coffee offers a 20% discount for economics explored listeners until the 30th of April 2020. For details are in the shownotes, you check out Lumo seriously healthy organic coffee at Lumocoffee.com. Righto, we’d better get into it. I hope you enjoy the episode. Michael Johnson from wealth channel, welcome to the programme. Hey, great
Michael Johnston 02:08
to be with you.
Gene Tunny 02:09
Excellent. Michael, looking forward to chatting with you today. I know that you’ve been doing a lot of thinking about the retirement income system in the US, and particularly the Social Security system. So I mean, we’re hearing all sorts of concerns about sustainability of that scheme. What it all, you know what the implications are? So, to start off with, I’d like to ask, what do you see as the the big issue with Social Security in the US? What’s the state of the retirement income system?
Michael Johnston 02:48
Yeah, great question. So to jump right into it, the state of it is it will not exist in its current form, and 10 years, it cannot. And that’s, that’s not a political statement. It’s just a mathematical one, like the way that the numbers work. And I’m sure we’re gonna dive into this. It cannot exist, the way that it’s existed for the last 40 or 50 years, something’s got to change. And something pretty significant has to change, because the math of it just just no longer works. And we can dive into why why it no longer works. And this is a big issue, because here in the US, I mean, we have we have a retirement crisis, people don’t have enough money for retirement. So Social Security becomes a big piece of that. And it’s I think it’s similar around the world to varying degrees, what extent this is a crisis. But here in the US, you know, depending on which numbers you use, in which year in which survey, it’s close to half of folks have no money saved for retirement, they just have nothing saved. Wrong. And that’s, you know, I don’t need to explain why that’s bad. But as folks, you know, sometimes retirement isn’t isn’t voluntary, you something becomes you get an injury, you lose your mental acuity, you can no longer work. So I mean, obviously, that’s, that’s, you know, in my mind, it’s a crisis. It’s a crisis that no one’s talking about is that no one’s prepared for retirement anymore.
Gene Tunny 04:05
So that means that half of Americans retiring, yeah, they’re going to be solely reliant on the Social Security check from, from the US government. Yeah,
Michael Johnston 04:16
that’s right. It’s Social Security. And this is why it’s so important is because they don’t have any retirement savings of their own, I should have, I should have qualified that they didn’t have retirement savings of their own or they don’t have nearly enough. So when when they do retire, for whatever reason, and at whatever age, they are, to your point there for a lot of folks, Social Security is a primary or the primary source of income in retirement. And it’s kind of a rule of thumb. You know, I always tell folks, you know, it’s not it’s not designed to replace your pre retirement income. It is designed to replace a portion of it, but it’s typically 25 to 35% of your pre retirement income that it’s designed to replace. So it’s a big piece, you know, and a lot of folks You know, even folks who have been doing their own saving, who have been doing all the right things, a lot of those folks are still counting on Social Security to be a big piece of their retirement puzzle. So, so that’s why this is why this is so critical here in the US is because it’s this, it’s a huge component. It’s a huge part of most people’s retirement plans. For some people, it’s the only part of it essentially. So to hear that it’s in jeopardy here that it’s it’s not on sound, financial footing or something needs to change. It’s going to impact literally hundreds of millions of people. And it’s their, you know, their livelihood, the way that a lot of them are going to put food on the table in what should be their golden years. Yeah.
Gene Tunny 05:37
And so how does it work? So you make, is it FICA contributions through your lifetime? Is everyone covered by it? How does it actually work in practice? Yeah, so
Michael Johnston 05:49
essentially, what happens is, every American has, for each paycheck, there’s there’s deductions from their paychecks, so they have their gross pay what they make before any deductions, one of the deductions is something called FICA, the Federal Insurance Contributions Act. Long story short, every American has 6.2% of their gross wages withheld as as a Social Security tax. And then their employer matches that their employer chips in another 6.2%. So 12.4% of your gross wages is put into Social Security on your behalf each year. And then once you hit a just kind of some, some nuances, and then some complex formulas and some options, so essentially, you pay into it during your working years. And then you have the option starting at age 62, you can push it back as late as age 70. If you want the formula switches and you start withdrawing from the system. And again, there’s a formula for what you can expect to get each month, it’s based on how much you put in. So the more you make, the more you put in, the more you can expect to receive, there is a what I call a progressive formula applied, meaning that essentially, the less you make, the greater percentage of your income is going to be covered. But yeah, at a high level, you pay into it during your working years. And then somewhere between age 62 and 70, the tables turn and you start pulling out from the system. And for a long time, this was great, because there were more more money flowing into the system, more money flowing into Social Security in the form of these payroll taxes, the FICA, payroll tax that you mentioned, there’s more money flowing in from that than there was going out to beneficiaries. So essentially, for the last several decades, we’ve had this surplus, and we built up this nice rainy day fund, what I like to call it this rainy day fund. But now the rainy day has come. And it’s going to be around for a while, unfortunately. So the tables have kind of turned here. And unfortunately, now the outflows are starting to outpace the inflows by by quite a bit, actually.
Gene Tunny 07:53
And that’s because the we had the big baby boomer cohort after the war, and they made a lot of contributions, but now they’re going to be relying on Social Security. So I mean, what happens? So if you don’t work? I mean, it’s, I guess most people will work to some extent, over their lifetime, but there will be some who, who have limited work history, or won’t or there’ll be in? I don’t know, you know, gig work or informal work. So are they covered as well, or they’re not covered?
Michael Johnston 08:29
Yeah, it’s, it’s a great question. So kind of to two parts of that. So if you don’t, where there is a minimum work requirement, you said, you have to work for 40 quarters, or for 10 years, you have to pay into it to be eligible. But that is that essentially has to be any above the table form of work. So if you’re doing gig work, you’re still paying into this. If you’re self employed, you’re still paying into this, you’re just paying the employee and the employer piece of it. So yes, there is a minimum requirement that you or your spouse has to work for, has to work for 10 quarters to be eligible. But you know, even if you’re self employed, or it’s gig work, or it’s it’s hourly work, you’re still paying into it. It’s regardless of your income level. It’s kind of different from our income tax system here. So so it’s, you know, it affects the vast majority of people, the vast majority of people are eligible for Social Security. They’ve done the minimum requirements that met the work requirements paid into it enough, worked long enough to be eligible for these benefits. And then I just want to go back quickly, quickly, gene is something you mentioned about, well, what’s what’s kind of happened here, like why have these tables turned? And there’s a couple things and one of them’s one of them is a great thing is that in America, people are living longer like they are around much of the world and that’s fantastic. Right? The life expectancy has has gone up quite a bit over the last 50 years more so for women and for men, but for both women are living a lot longer men are living quite a bit longer. And that’s that’s wonderful, right but From a fiscal perspective, that means that they’re collecting benefits for longer, you know, five years of life expectancy means another 60 monthly payments of Social Security. So that kind of threw a wrench into some of the plans. And then as you mentioned, people having fewer kids back in the 1960s, the average woman here was having something like 3.6 Kids, essentially fallen in half. And that’s just a massive, massive decline. And I know that similar things are happening around the world, some places more acutely than in America, some places less acutely, but similar issues playing out all over the place. Yeah,
Gene Tunny 10:34
yeah, exactly. So just thinking about this. So this dates back to FDR, doesn’t it to the days of the New Deal, and they set up a trust fund to to fund this, the Social Security benefits? I mean, I guess, you know, maybe there was some modelling done back in the 30s. Whenever they said it, set it up the actuarial modelling you need, but I mean, the issue is the issue that there’s an act of Congress, which sets out the entitlements, to Social Security, what you’ll get paid, but that doesn’t bear a close connection with, you know, the actual financial health of this game. Is that the issue?
Michael Johnston 11:15
Yeah, so the, I mean, this year, as of this programme, kind of, it kind of stands alone, and it has one source of income. It’s this, this payroll tax, that we talked about this FICA, the 6.2%, that the employee pays and the 6.2% that the employer pays. So it has essentially one source of income. And that source of income is dependent, essentially, on how many people are working, how many people are entering the workforce and staying in the workforce? So it’s, you know, there’s not, we can talk about this a little bit more, there’s a few levers you can pull there, but it’s essentially very dependent on how many people are working, and how much are they paying into the system. And that has been, I think, under it’s been less than what was initially projected, or was kind of projected a long time ago, for the reasons, for one of the reasons we talked about starting in, you know, in the mid 1980s, like in the mid 1980s, the birth rate had fallen quite a bit because similar to now inflation was really high interest rates were really high, it was not a great time to be having kids from a financial perspective. And so the birth rate had fallen, and now you fast forward. From there 2030 years, there weren’t enough babies born 20 years ago that are now entering that are now entering into the workforce. So, you know, that’s the issue is that there’s there’s not enough. But essentially, it’s kind of coming at it from both sides. There’s there’s more beneficiaries than were anticipated, because people are living longer. And I want to emphasise again, that’s a great thing. And on the other side of it, there’s not enough people who are now just coming into the workforce who are able to essentially pay into the system through this payroll tax. So that’s the issue is that those those two things again, for a long time, it was kind of the reverse, there was more money coming in and there was going out. And unfortunately, now, now it’s it’s flipped.
Gene Tunny 13:05
Yeah. And do you know, the and what are the projections? So like, it’s got a there’s a balance, and you’re saying that the outflows are exceeding the the inflows and so therefore the balance is going to be running down? Do you know what the roughly what the current balance is? And when it’s projected to get to? to zero?
Michael Johnston 13:24
Yeah, so it’s, you know, it’s been for the last 4050 years, there’s been, like I said, this the surplus, and we’ve done all the right things, right, we set it into this trust fund into this rainy day fund. Because that’s, that’s what you should do in that situation is exactly what you should do. So let’s see, I’m pulling up the reserves here. And it’s almost peaked out at almost $3 trillion. We had in this rainy day fund that was built up over the course of 4050 years of these these surpluses, the problem is now this has just flipped within the last couple of years. And we’re depleting that that $3 trillion at a pretty incredible pace. So it’s going to run out somewhere around 2033 2034, based on the current projections, so less than a decade. So I mean, you could call that good news or bad news, right? We kind of see this calming theory, we’ve got time to do something about it. It’s not going to happen tomorrow or next year. We’ve got time. But it’s pretty incredible that, again, just the rate at which this has been depleted, considering that it was built up over many, many decades. And this just slipped by the way within the last couple of years was the first time we had more money going out than coming in. But it’s it’s hundreds of billions of dollars a year that it’s going to be about 150 billion this year that we deplete, and that number is only going to go up so we’ve got this massive rainy day fund, but unfortunately, it’s just been depleted very, very quickly.
Gene Tunny 14:51
Yeah. And Michael would you know what’s, what would actually happen is it if it did run out of money with the Treasury So you have to inject funds into it? Or would, or would it just be? Oh, well, we’ll just got to make do with what we’ve got. I mean, do you have any thoughts on what? what would actually happen in that case? If it didn’t have enough money?
Michael Johnston 15:13
Yeah, it’s, it’s a great, it’s a great question. So there’s, there’s kind of a couple of ways to, to answer that question. I guess I’m not actually sure gene statutorily, or, or, you know, mechanically, what would happen if, if nothing else changed, and we hit that point. So, you know, a lot of people have this misconception that Social Security is going bankrupt, and it’s not going to be around, you’re not going to get anything from it. So that’s partially true. But it’s actually this, it’s this trust fund, more specifically, that is going bankrupt. So in 2033, I said that this trust fund is going to run out of money in 2033, Social Security is gonna have more money than ever before coming in. The problem is, it’s also going to have more money than going out. Yeah, right. Yeah. So this this trust fund right now that we’re dipping into, that’s only covering a portion of the benefits, the lion’s share of the benefits are still coming in each year from these payroll taxes. So that’s a misconception that a lot of people have a lot of really smart people have, you know, part of it’s due to these these fear mongering headlines, you see, Social Security is going bankrupt. Yeah. Can I get your benefits anymore? So So yes, it’s, it’s, it’s certainly not on financial flooding, like I said, it’s not going to exist in its current form a decade from now something needs to change, but it’s not as if it’s, it’s not as if the entire system is going to collapse, it’s still gonna be you know, it’s still gonna be generating, like I said, 2033 will be the best year ever, in terms of inflows into Social Security. The problem is that the outflows are also going to be are also going to be at their their highest level ever. So. So as far as what would happen, well, like something’s gotta give, right, we’ve got to either get more money into the system, or we’ve got to cut benefits and stop spending less essentially, the only expenses is benefit payments to retirees. So there’s actually there’s a lot of different levers that that could be pulled there, at a high level, you’ve either got to raise taxes and bring in more money, or you cut the cut the benefit payments, but it wouldn’t be cutting it by 100%. It would be cutting it by 10 to 20%, essentially. But that’s again, I don’t want to minimise that that’s a big deal for a lot of people who have been counting on this, and they’ve been paying in each month each week, whatever it is, and kind of counting on having this in their retirement all of a sudden tell them actually we’re going to cut it by 20%. Put a lot of people on a pretty tough situation. Yeah,
Gene Tunny 17:38
yeah. I mean, it sounds. Yeah, politically. I mean, it sounds like it’d be very difficult to do that. And I know that this is an issue in the it’s been an issue in the political debates. And one of the I think, saga and Jerry made this point on the breaking points channel, he said that, you know, this was one of the reasons that Trump was popular with a lot of people in middle America, because in 2016, he came out and said, I actually support social security, and I won’t cut those benefits. I think it’d be very challenging to do that. Would you ever feel for how much the contributions would have to increase Michael to actually make put it on a sustainable footing?
Michael Johnston 18:17
Yeah, it’s a it’s a great question. So yeah, I think that Well, first of all, you’re absolutely right, that this is a couple of ways to look at this, that if you want to, if you want to look at his glass half full, there’s a lot of ways to fix this, right? There’s actually kind of a lot of levers you can pull, and we’ll talk more about those. The bad news is they’re all terrible options, like they’re going to they’re going to really anger, one group of people or another. Like there’s no good options here. There’s no easy fix. And politicians generally like to stay away from from problems that have no easy fix, it’s kind of guaranteed to piss off someone in one way or another. They like to stay away from those for as long as possible. So I’d expect this Ken to kind of get to kind of get kicked down the road. Now towards kind of more specifically answer your second question there. If we were to say, you know, if we were to say, Okay, we can’t cut benefits, that’s, that’s off the table. And I tend to think that’s the case because that would upset retirees who are counting on this. And in the US one thing retirees do pretty consistently, one thing they’re pretty good at is they show up on election day. And the candidate who says, Hey, I’m cutting your benefits by 20%. Like, I just don’t think that’s practically viably an option. I don’t know maybe I can be proven wrong. I don’t have a great track record of predicting political outcomes. But that just sounds like you generally don’t get elected here. And I think in most places by kind of angry and or upsetting the retirees. So that kind of puts you to the other side of the equation. Well, if we’re if we’re not going to cut benefits, if we’re not going to slash benefits, how much do we have to increase taxes? So the estimates that I’ve seen are I’d have to go About 12.4%. So again, right now that’s 6.2% coming from employees, their employers match that. So you get to 12.4. I’ve seen estimates that if we increase that to 16%, so presumably eight and eight, that would shore this up for 75 years or so. Now, that’s I think that’s, that’s a big ask to to tell people in this current environment, when when inflation has already taken a huge bite out of their paycheck, you know, hey, by the way, we’re going to take another, we’re going to take another 2% out of your paycheck, and by the way, employers, your payroll cost just went out by it’s a lot more than 2%. Because it’s, it’s, you know, instead of paying 6%, they’re paying, they’re paying 8% here. So, I mean, that’s a tough sell to right. So you kind of say, retirees, I’m not going to cut your Social Security, that’s one way of hearing that message. The other way is, well, the only other option then is to increase taxes. So right to kind of to two bad options there, at least in my mind, those are our two bad options that I think would be difficult sells politically to different groups of people for different reasons. But but still tough sells politically. Yeah.
Gene Tunny 21:11
And so these contribution taxes are these payroll taxes, they’re the same, regardless of the person’s income, is that right? And in terms of the rate, there’s no, there’s not a progressive rate at all?
Michael Johnston 21:24
Correct. It’s not a progressive rate. So so it kind of starts at your first dollar and it goes up. So there is actually kind of the opposite of that there is a cap on it. So I think for for this year, it changes each year, I believe that only your first it’s about $168,000, you pay this 6.2%. And then after that, it drops to zero. So only the first bout $168,000 of income is subject to the Social Security taxes. So I think you’ve touched on here, you’ve kind of got the two extreme options, you raise taxes to 16%, you slash benefits by 20%. Those are like the two easy extreme options. And then you get into kind of all these little things you can do around the edges that kind of nibble away at this. And you just you just touched on one of them with that last question. That’s one of the things you can do, you can say, okay, it’s no longer only your first $168,000 Look, bump that up, it’s the first $250,000 Or it’s the first 200,000 Or you know, you can move that up and down, you take the first million dollars in social in, in your, your income is going to be subject to Social Security taxes, and you kind of start nibbling away a little bit at the edges. It’s not quite as big of a lever to pull as just saying, we’re going to increase the tax rate to 16%. But I don’t know, I think personally, my opinion here. I think that’s a lot more palatable politically to say we’re going to make because it kind of targets high earners, right. So we’re going to say, we’re going to raise this this limit from 168 to 250. It’s going to bring in a little bit more money, like yes, it’s a tax increase. But it’s it’s only really affecting people who make more than $168,000 a year. So then you kind of start getting into these, like I said, these little things that they kind of chip away at the problem. They don’t they don’t fix it in one fell swoop. But you kind of start to nibble away at it. Yeah,
Gene Tunny 23:16
I’m wondering, I’m wondering, too, is whether it’s a bit technical. I could I might, I can look it up later. I’m just wondering, has that 100? And was 168,000. Has that been indexed to inflation? Or does it get regularly adjusted for inflation? It
Michael Johnston 23:31
is, yeah, it’s been indexed for inflation. So it is it is going up, you know, which I think makes it a little bit harder to it’d be easier to sell if it had gone up 20 years, right. And it was at this level that was last set and 9090 or something, but it has gone up, which I think makes it you know, a little bit of a harder sell. But I still think that’s probably one of the least one of the least controversial ways to do this. Or it’s going to upset the the fewest number of people here. And I think there’s some other options too. And maybe we can talk about the like, I think there’s other ways that you kind of, I call it you kind of Frankenstein together a solution. You don’t you don’t take this drastic action of slashing benefits or this really visible significant tax hike. But you can kind of I think string together a few of these things that kind of maybe start having that effect.
Gene Tunny 24:19
Yeah, yeah. Well, I mean, I think in a lot of the, the policy outcomes you see, or the you know, the attempted solutions are Frankenstein solutions in a way. So yeah, I’d be interested in your thoughts on that marketplace.
Michael Johnston 24:35
Yeah, so I think you know, one of the things you can do is you can increase the retirement age. So right now in the US, we say that the full retirement age is 67 years old. So people are living longer. I mean, you could say, well, you’re not going to start getting your benefits at 67. Now we’re going to bump that up to 68 or 69 or 70. And we’ve actually done this before like the the starting age for Social Security used to be 65. And then it went up to 66. And now we’re kind of gradually phasing it up to 67. So, you know, that’s, that’s one of those things that again, kind of kind of nibbling around the edges. And it means that you kind of this is on the other side of the equation. Now, on the benefit side of the equation, that means, well, next year is justice, security’s not gonna have to pay out to 67 year old, you got to wait till you’re 68 6970. I think that that kind of chips away at it a little bit, you could also tinker with. So to your point, you asked about indexing for inflation. So Social Security benefits go up each year, they get adjusted a cola adjustment, a cost of living adjustment, so those benefits go up each year to account for inflation. So you can tinker with that a little bit. And that’s effective, like, it’s the same thing as cutting the benefit, like you’re effectively cutting the benefit, right, because you’re gonna have less of a cost of living adjustments. So it’s it, but I think it’s my point, I guess is I think it’s more palatable. Even if the the bottom line effect is the exact same, you’re effectively cutting benefits to say, we’re going to rein in those cost of living adjustments every year, we’re going to do them a little bit less than the general rate of inflation, and we’re gonna change the methodology of how we calculate those. So we’re gonna lower we’re going to rein in our benefit payments or outflows a little bit, but in a way that maybe isn’t quite so offensive, politically raw, stringing together some of these and you kind of start to have, I think you start to get to shoring up this programme, or at least kicking the can a little bit further down the road. You know, another option and to just get into, like a political lightning or out here is another another lever level here is immigration, right. Like, if you need more people to pay into the system, one way to do that is to bring in to loosen the immigration restrictions and say, Let’s have let’s have a lot more people coming into the country who are going to work, who are going to pay into Social Security. And that kind of offsets the fact that people are having so few kids 2025 years ago. So, you know, again, I don’t think any of these is this is the fix on its own. And there’s there’s issues with all of these things that I’ve proposed here. But you know, it’s kind of done in moderation, you get to start putting stringing together, something that moves the needle.
Gene Tunny 27:26
Yeah, yes. I was just thinking about that, Michael, I mean, immigration, I guess the issue is that, you know, that could help you maybe for 20 or 30 years within the immigrants themselves retire. So if they’re not having, you know, if their fertility rates not much higher than the existing population, then yeah, that that may not be it’s
Michael Johnston 27:48
a great point, right, like, absolutely. You would. And I think that’s, you know, that’s kind of a problem with all of these solutions is, I don’t know that any of them kind of get to the structural issues here. There are ways to, to kick the can down the road a little bit further. And I think that’s kind of an interesting conversation as well, if we’re going to tweak this, do we tweak this towards an off ramp? Like, do we start steering this towards that call this essentially a failed experiment? And say, Well, if we’re going to tweak it, let’s tweak it in a direction that starts to kind of wine this thing down and eventually get us get us off of this? Or do we kind of double down on it and make it more entrenched? And, you know, I have, what kind of my preference would be to go towards the the former of those, I think that’s extremely unlikely. Again, I think these these are all pretty politically unpopular decisions. So I think we’re more likely to double down on this than to kind of, if I were steering the ship, I would kind of steer us off of this, I’d say, pick the intentions were good, but that the math of it just just just no longer works, right? Wrong.
Gene Tunny 28:55
Yeah. Just don’t go ahead. And
Michael Johnston 28:59
I say that because I kind of think it’s an interesting thought experiment of if this were optional, right. Like, that’s the thing. And maybe I should have mentioned that the beginning like this is mandatory, you have to do this. It’s essentially a forced retirement programme. But it’s a forced retirement programme that has pretty bad returns, like the effective return, like, like I’ve paid in hundreds of 1000s of dollars, or my employers have into Social Security, and I’m affected like, I’ve run the numbers, I’m effectively earning a 2% return on that. If you look at the numbers of the money, I’m going to pay in between age 21 and 67. And then what I’m going to get out between 67 and whenever I die, like the numbers are not great. It’s essentially like a 2% return on investment during a period where the stock market has returned eight nine 10% a year. So it’s it’s it’s not it’s mandatory, but unfortunately, like the results are just not good the way that it was set up. So in a perfect world, people would be setting aside this money on their own but you know, of course, that’s That’s not easy for other reasons to think that people are going to, to kind of magically change their behaviour and start planning on their own for retirement. So I hope we’re not depressing people out there too much Jean, I keep saying there’s no good answers here. Right. And this is a messy situation and sticky. But I think it’s fascinating to look at kind of how we’ve gotten here, what went wrong, and, and to kind of explore these different reasons why, why there is no good reason and what, you know, what becomes most acceptable and kind of the least bad option out there. Yeah, but no one was hoping for a super uplifting, rah rah conversation here.
Gene Tunny 30:36
Yeah, I think the the issue the problem is in the states is that is the politics around it on the retirement age. So I’m just thinking. I mean, there’s one option, I mean, sure, you can raise the retirement age. But what about could you grandfather, the recipient, so draw a line in the sand and say, Look, if you’re, for those people who haven’t turned 18 yet, or people who were born in, you know, in 2005, or whatever, you’re going to get much less benefits from Social Security is just going to be a safety net, and we’re going to push you into this new scheme, we’re going to have individual retirement accounts, compulsory individual retirement accounts. Could something like that work? Yeah, I
Michael Johnston 31:24
think I think it could, like you’ve got to make, you’ve ultimately kind of got to make, you’ve got to make the numbers work. And, but but I think like that is, that is what I would prefer, we steer towards a steer towards a way where we kind of, we kind of get off of this, and it’s going to upset, you know, it’s going to upset, it’s gonna upset someone, right, you’re gonna have like you said, you’re gonna have to draw a line in the sand somewhere. And there’s gonna be a lot of people who are just on kind of the wrong side of that line in the sand, who who are maybe going to, you know, do worse than that 2% number I mentioned. But yes, I think that you, I think that you could do that, I think we should do that. Honestly, I think we should steer more towards kind of these individual retirement accounts, instead of just throwing all this money into into one bucket. And then kind of dishing it out of that one bucket. Yeah, I think you know, the devils in the details on that. But I think that that’s, I think that would honestly be the responsible thing to do.
Gene Tunny 32:23
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Gene Tunny 32:58
Now back to the show. Gonna ask on this retirement age to i One concern that people have is that we’ll look lifting the retirement age, that’s, that’s fine for professionals. For, you know, it’s but what about for manual workers who, you know, they really look forward to retirement and, you know, manual work is challenging as you get older. I mean, what, what happens if someone can’t I don’t know enough about the US Social Security system. But what happens if someone you know, they’re in the late 50s or early 60s, and then they really can’t work for medical reasons, they feel they can’t work in a manual job. Is there any coverage for them?
Michael Johnston 33:48
So there’s, there’s a couple of parts of this system that I think are designed? And I think do I’ve been kind of beating up on the system a little bit, but there’s some, I think, some some good parts of it, too. So one of them is we’ve kind of been talking about people who retire voluntarily for the most part of this conversation. Social Security does also the other people who get to security are those younger than retirement age, who had some sort of disability. So there’s, you know, there’s a process for verifying that and for applying for those benefits. So that’s a part of this programme. It’s a pretty small part of it. But But yes, that that that does exist. And then kind of the other nice, I guess, flexibility that’s built into this system right now is so at age, by default, your full retirement age is 67. That’s when you’re going to start receiving your benefits. You can say, You know what, I’d like to start benefits at 62. That’s the earliest you can do it, and you’ll get a smaller benefit payment. But if if for whatever reason, whether you want to or you’re you’re forced to, you can say I’m gonna start at 62 I don’t want to wait till 67. I’ll take my smaller amount, and I’m going to start getting it earlier. And you’re able to do that. And I think for the reasons that you mentioned that type But flexibility is important. And you can go the other way too, you can say, I’m going to, I don’t need to start at 67, I can rely on my personal savings or I’m still working. I’m going to wait till 70. And to incentivize that behaviour, the Social Security Administration will give you a little a little bump then. So instead of, you know, getting it’s effectively for each year, you delay receiving benefits, your benefit increases by 8%. So, if you said, I’m going to push it back from 67 to 70, voluntarily, they’ll say, Great, thank you for waiting to start receiving benefits, you get an extra 24% Bonus, essentially. And then the reverse the math is a little bit different. But essentially, if you want to bump it forward by by five years, you’ll get only 70% of the benefit you would have gotten otherwise. But you get to start it earlier. And actuarially, these numbers kind of all work out pretty similarly to the amount you expect to receive. Between when you over your lifetimes. Yeah,
Gene Tunny 35:54
I’m quite stunned by the number that we started at that we started the conversation with this 50% of Americans don’t have any retirement savings, I guess, what do we know if there actually is probably it’s bad, it’d be bad, even if you looked at added at a household level to because that’s individuals, but you’re going to have some people who are you know that you’re in a couple. So maybe one partner doesn’t have any savings, but the other partner is, has reasonable savings. But that probably doesn’t help the number too much. I’m just trying to wrap my head around what it all means. So it means that it
Michael Johnston 36:34
means well, so I think I think there’s kind of a couple of reasons for this. Like, how did this happen. So if you go back a generation or two generations, like my grandfather worked his entire career at General Electric. And when he retired, he got a pension, he got a guaranteed what’s called a defined benefit plan. So there’s a formula for calculating it, he worked there, let’s say you worked there for 40 years, and for every year, he got 2% of his salary. So he retired and he got a check every month from General Electric, even though he was no longer working there. And that used to be the norm here in America is that these pensions were what funded a lot of people’s retirement plans. And those have gone away. Like, at least in the States, the number of so called defined benefit contribution plans where you get a check each month from your employer in retirement, there’s still some, it’s mostly public sector employees, it’s cops and firefighters and teachers, some university employees will still have those defined benefit pension plans. But for the most part, those have gone away. And, and I think the idea was was well, you know, if employees, the individuals will step up, and the employers will fund these another way, but like nothing’s really stepped in to fill that gap. So it used to be fine to not save money for retirement because your employer was effectively doing it for you, and you are going to continue to get a paycheck from them after you retired. And that’s, that’s, that’s not the case anymore. And then I think just you know, culturally, like just to call it what it is, or to give my opinion on it, we’ve got a very consumer focused culture here, people spend money, they don’t have a lot of they spend money on status symbols that they don’t really need. You know, there’s a lot of of not great financial literacy and financial behaviour that goes on. We still don’t teach financial literacy in most schools here. And I think it’s a, you know, that’s a cultural problem. Like, I think that this is solvable, but it involves understanding the concept of, of spending more than you make, and compound interest and the, you know, the, the stigma of having debt, it requires understanding all these things and making it kind of a part of our culture, which unfortunately, right now, it’s very, very focused on, on spending and on the status symbol. So and I think there’s there’s similar issues around the globe, probably, to different extents. Yeah.
Gene Tunny 39:04
I mean, just as an outside observer, one thing that I think is, you know, does make it difficult for some people in the US is that you don’t have a well, you’ve got Medicare and Medicaid, but you don’t have a single payer or public health care system the same as we do in Australia or in in other OECD economies. And because I know that so many people in the looses the impression I get from the media that a lot of people in the US, they lose their savings, they get driven into bankruptcy because of medical debt. I mean, I don’t know if you’ve got any thoughts on that. But that just seems to me is something that is, you know, makes the situation in the US more difficult than in other countries.
Michael Johnston 39:47
Yeah, I think I think there’s a couple of things. I think there are plenty of those. I’ll call them acute instances where someone unfortunately has a significant injury and they kind of one off In this acute instance, they acquire a bunch of medical data, they have kind of massive one off costs. But then I think there’s a lot of kind of death by 1000 cuts to our cost of health care. And that in the States has gone up here. It’s way outpaced the cost of inflation just over the last 20 years, the cost of health care has skyrocketed. So even if you don’t have this acute event where you have an unfortunate accident or disease that requires huge outlays, I mean, you’re kind of like I said, you’re getting you’re getting paper cut to death, right, just with the the metric the premiums that you have to pay and kind of all these things that that add up. You’re absolutely right. It’s both those those kind of acute instances as well as healthcare in general, just counting for a big portion of a budgets here of household budgets.
Gene Tunny 40:48
Yeah, that’s we probably can’t tackle health care as well as social security day, unfortunately, it’s it is a big issue. I’ll have to cover it again on the show, because I know it’s a huge, a huge challenge there. Like, I want to ask you about it again, on this low level of savings. Or it’s extraordinary, because from my understanding, there are good tax effective retirement savings options available in the states aren’t there, I had a guest on who was talking about the 401, Ks and Roth, IRAs, the individual retirement accounts,
Michael Johnston 41:26
ya know, those are two incredibly powerful vehicles that allow you to essentially defer and eliminate a lot of taxes. So yes, and it’s a great question. And I think that these were introduced in kind of response to a lot of corporate employers cutting pensions with the idea was, okay, well, if pensions are going away, let’s give Americans these tools so that they can invest in a tax efficient manner, they can shield a lot of their significant portion of their assets and their income. And, you know, the trade off is the way that these accounts work at a very high level is you can defer, you can defer your income tax and instead put the money into this tax advantaged account. And you can shield it from from dividend and capital gains taxes. In the meantime, the trade off is you can’t just pull out money, if you want to go to if you want to go to a basketball game, or you want to go gamble, if you want to buy a sports car, you can’t just pull the money out, you’ve got to keep it in there. In most cases, it’s until just before age 60, age 59 and a half. So the idea here is let’s incentivize good behaviour, let’s give you these great tax advantages, if you invest in this account that you cannot touch until you’re 59 and a half. And you’re going to therefore kind of remove the temptation to blow this all on on something frivolous and something unnecessary. And we’re going to force good behaviour. So yes, those tools are there. And that’s part of the frustrating part of the frustration here is that they’re not being utilised to the extent that they should be I think part of it is folks are are unaware of them, it still requires level of discipline, even if you even if you are aware of them. It’s not that you know, it’s not that exciting right now to to put money in your 401 K when the alternative is you go buy something flashy that you don’t really need. So kind of comes down to delaying gratification. But yes, absolutely. These tools are available. And I You’re preaching to the choir, that more folks should use them and kind of take ownership here.
Gene Tunny 43:26
Yeah, I mean, what we do in Australia is we have I guess, we’ve got an age pension, which is, is funded out a consolidated revenue, and it’s not linked to what you contribute at all. It’s just available depending on eligibility, you get to a certain age, there’s an asset test to for, for assets other than the family home. But otherwise, it’s you know, it’s different. And then we also we brought in individual retirement accounts, I think that’s how you what you’d call them in, in the states the the superannuation, and that’s, you know, that there’s a huge pool of super assets as that’s been built up. Now there are, there’s a big debate about whether we should let people withdraw from that to get a deposit for a home. I think that’s probably a good idea. And then there’s, you know, concern concerns, maybe we’re paying too much into it, maybe the unions have got too much control of the funds. There’s all those sort of issues, but broadly, I think it sounds like, you know, relative to where the states is, I mean, we’re probably in a better position here. But everything’s, you know, it’s not all doom and gloom. Like I think you were saying, Well, this is a depressing conversation. I’m not, I think it’s actually quite, it’s been good for me, because it’s given me a good appreciation of what those levers are, that could be changed and because one of the things that that you often hear is that it’s called a Ponzi scheme. What do you think? and give that characterization. Well,
Michael Johnston 45:01
I would say that a Ponzi scheme is is fraudulent, right? It’s, it’s illegal. It’s inherently fraudulent. And for anyone listening who’s not familiar, essentially it means so let’s say Jean invest his money with an asset manager. And then I invest behind him. And this asset manager pays him out with some of my money. So essentially, it’s a fraudulent way to inflate returns. And Gene says, holy cow, this manager did a great job for me, I got a 50% return in just two years, I’m gonna go tell all my friends, and essentially relies on your it’s not actual games, you’re kind of paying them out with other people’s money. It’s fraudulent, it’s very clearly illegal. There’s nothing about Social Security that at least to my knowledge has been fraudulent or illegal or anything shady like that. It’s incredibly transparent. It’s working exactly like it was designed to there’s no kind of shady cooking the books things that are that are going on. So now, having said all that, essentially, is, you know, it’s not totally baseless claim, because it relies on kind of the same mechanism that a Ponzi scheme does. It relies on new people coming into the system. In this case, they’re, you know, new employees entering into the workforce. If they were all go away. We have no money to kind of pay out the retiree. So the mechanism is the same. But I want to make I think it’s important distinction that, you know, there’s while there are some similarities, there’s, you know, I’m certainly not I don’t think anyone’s accusing Social Security of being fraudulent or deceptive in any way. It was maybe just kind of poorly designed, I guess you could certainly accuse it of being that but to my knowledge, at least there’s there’s no serious accusations of any any kind of fraud or any misdoing in that way. Yeah.
Gene Tunny 46:51
And a point that Ryan Grim on counterpoints, which is part of that breaking points network he made the other day because they look at this issue quite a bit. From time to time, he was saying, well, let’s never missed a payment in over 80 years or something, whereas a Ponzi scheme probably would have been that times that would have collapsed. So it’s just a matter of Yeah, to me, it looks like it’s a matter of getting those benefit levels, right. Maybe they do need to be adjustments, increasing the retirement age, looking at the rate of contributions, but again, the politics that are difficult, just seems to me that there seem to be more focused on this or or there seem to be more practical policy work going on to try to resolve this in the 90s. And, and up until maybe, I don’t know, 10 years ago, I think was Paul Ryan, looking at some stage. But even Joe Biden, Joe Biden, when he was in the Senate was looking at this is Is there anything actually going on behind the scenes that you know, have to fix this?
Michael Johnston 47:55
Yeah, it’s it’s a great question. I’ll be honest, I don’t know how serious or how advanced you know, a lot of times in the states here, we you kind of have the the idea that that people are working on things, but it’s effectively a campaign mechanism to kind of talk about it at a very high level. I don’t know the extent to which there are, you know, aides behind the scenes, sharpening pencils and running calculations and kind of actually trying to find a viable path forward here. I think that it is, I don’t think we’re at that point, I think that this will continue to get this Ken will continue to get kicked down the road. Like I said, we’re still you know, we want to look at glass half full. And some good news here. We have time here, right? We have time to fix this. We’ve got a decade still. So I think that there are more pressing issues. And this is going to be fixing this is going to be a thankless job, because it’s going to upset guaranteed to upset someone, there’s no easy way to do this. And I think that thankless jobs that don’t need to be solved tomorrow, tend to get tend to get pushed down the road, probably quite a bit, which is unfortunate, because that’s uncertainty for investors, right? Like not knowing. In theory, the more warning you have, and the more clarity you have, the more time you have to react to this, to change your behaviour and to kind of come up with a solution. But to the extent that you’re kind of left guessing into the last minute how this is going to play out is you know that that ultimately hurts the investors. But I think that’s what’s going to happen here. Yeah.
Gene Tunny 49:28
Well, it’s a very important issue, because as part of the whole, I mean, you need to get Social Security fixed up. And then there’s a broader budget challenge. There are concerns about, you know, growing federal debt and what that means, whether that’s sustainable or not, and what that means to the global economy if there’s a fiscal crisis in the US, so I mean, that would have huge ramifications. So it’s something that I’m looking at very closely. Michael, is there anything else on this on this issue that We haven’t covered that you think would be good to, to inject into the conversation before we wrap up? Yeah,
Michael Johnston 50:06
I think I think we’ve kind of covered it here, we’ve kind of been pretty, we’ve been pretty wide ranging here. The one thing I was I was just thinking is we kind of talked about this, this Frankenstein solution where no one thinks the lover moves the needle, but you kind of stitch together enough of them and you start to get there. I think another thing that I’ve seen discussed, is you remove the tax benefits from some of these things like our IRA, or Individual Retirement arrangement, our 401 K plan, I’ve seen that discussed, as well as that’s another way to raise some incremental revenue for the system here is a, you’re no longer gonna get the tax benefits from contributing to a 401k from contributing to an IRA. And we’re gonna funnel that money towards social security instead, it’s a little bit, you know, robbing Peter to pay Paul like to kind of write trying to solve the retirement crisis and saying, Well, we’re going to penalise this type of retirement account to bail out this type of retirement account. But it’s, you know, it’s more it’s kind of more politically palatable, maybe so, you know, I guess in closing, I would say, I hope that this is one of those issues. It’s widely misunderstood. And, you know, I hope that we could kind of have an honest discussion about the merits here, or the merits of the system, where it’s working, where it’s not the pros and cons of the different approaches. I know, that’s incredibly naive, I can kind of feel people rolling their eyes at me saying, you know, this guy thinks we’re gonna have an intelligent conversation about this heated issue. So I know that it’s gonna, it’s going to be political. And it’s going to be a major point of all the campaigns probably for the next several years, but in my heart of hearts, I’ll hold out hope that we can have a an adult conversation and, and fix this sooner than sooner rather than later and come up with a compromise. Yeah,
Gene Tunny 51:54
yeah, I hope so too. Okay, Michael, before we go, your wealth channel, wealth channel Academy, your pitch is becoming or your tagline becoming a millionaire, is easy. And I’ll put a link in the show notes to your site, you say there’s seven basic concepts to understand. So I think, are there any? Is there anything you’d like to say about, you know, what you’re doing with wealth channel that? Yeah,
Michael Johnston 52:25
they Thank you, Dan, I just, I guess, I just like to say, we encourage people to take ownership take ownership of your financial future. So you are not dependent on Social Security, take advantage of these 401 K’s these HSAs IRAs. And, you know, assume you’re gonna get nothing and from from Social Security and take ownership of your financial future. It sounds complicated, it’s really not that complicated once you dive into it. So I’m kind of on a mission to simplify this process for people help them feel more confident with this process of planning for retirement, understand what’s actually going on what they actually need. So, and this is, you know, a great illustration of why so that you hope Social Security will be there, and the full amount you’re expecting, but if it’s not, you’re covered anyways. Right? Yep.
Gene Tunny 53:09
And so if you start saving at a young enough age, and I mean, the math of compound interest shows it’s you know, the earlier you start, the better, and you get so much benefit from starting in your, in your 20s as soon as you’re getting a good or even earlier, or getting a good salary saving, or any sort of salary saving a bit a little bit, or as much as you can, and then that just builds up and compounds over time. And you could be in a situation is it right, where, you know, if you get you could get some social security, but the majority of your income will be from those those assets earnings from those assets. That’s right.
Michael Johnston 53:44
That’s right. It’s you know, there’s, there’s a path for a lot of people to retire with a million dollars in your 401k or a million dollars in your IRA. And exactly what you just said Albert Einstein said that compounding returns are the eighth wonder of the world and he was a pretty smart guy. So good advice to follow. Start, start early. start young and do what you can. Very
Gene Tunny 54:05
good. Okay. Michael Johnson from the from wealth channel. Thanks so much for the conversation. I really enjoyed it.
Michael Johnston 54:12
I did as well. Pleasure to be with you.
Gene Tunny 54:15
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