Possible case for saving any FICA (social security) tax cuts you get

[ApatheticNoMore]

I originally posted this in public policy but I think it should be here, since it is really about the personal finance implications:

Background: social security taxes have been cut by 2% for the employee part. In addition Obama has proposed a "job bill" continuing the 2% cut and cutting the employer part of social security taxes as well.

If the social security we receive in the future depends to some degree on how much we have contributed to social security in a lifetime (and it does, even though there is also some redistributive element), and if social security taxes are cut and thus we are contributing less, is this a cut in our future social security benefits? Oh I know social security may not pay out as much in the future as it does now blah blah blah, some say it might not be there at all but that seems a bit much. I am aware of all that and always have been, it says that future payments may be less on the very social security statements one gets once a year even! Ok so social security benefits are dependent not only on what we have paid but on the ability and willingness of future generations to finance them. Ok. But the question is, are the cuts reducing our future social security benefits *whatever they may be* (assuming they are more than zero which will probably be the case)?

If so, um, IMO the working middle class (and anyone else who both can and needs to) really needs to get hip to what is being done and at least start saving that difference in an account for retirement or doing something to improve their chances economically when they get older. Maybe they should even save the employer part if one ends up being passed into law (I don't think that cut has been passed yet, it was merely part of the jobs bill). The cut in the employer part does reduce the cost of hiring no doubt about it (although significantly? I don't know), but it is really an invisible cut in an employees wages (it cuts their future social security benefits) and maybe, even though they don't have the extra money, an employee should save that cut also anyway, because their future social security benefits have just been cut.

[haha, if the middle class only saves it's tax cuts they'll never cut taxes on us again and only on the rich. >8) Yea "paradox of thrift" going on here, but I'm just thinking about our long term finances in old age]

[Alan]

Cutting social security withholdings will only hasten the demise of the social security system. It is already forecast to be insolvent in just over 20 years, so, this will certainly accelerate it's death spiral.

Of course, that's assuming that modifications to the entire system do not take place in a timely manner, and we've already seen that any attempts at this time to deal with the issue ends up being demagogued as "trying to take away your social security benefits". It seems there's no immediate benefit to correcting a long term problem, especially if you can convince enough people that the problem doesn't exist.

I'm very much in favor of people using as much of their available resources to invest in private retirement accounts as a hedge against our elected officials unwillingness to fix the problem. As long as we allow politicians to "take care of us", we're going to be disappointed. It's time to start taking care of ourselves.

[ApatheticNoMore]

Cutting social security withholdings will only hasten the demise of the social security system. It is already forecast to be insolvent in just over 20 years, so, this will certainly accelerate it's death spiral.

I think this is right and Obama may have just further butchered the greatest accomplishment of the Democratic party and the New Deal, one of the few (besides unemployment insurance and some environmental legistlation) unequivocal triumphs of the Dems for the sake of a silly "jobs bill". This is most definitely public policy though :)


I'm very much in favor of people using as much of their available resources to invest in private retirement accounts as a hedge against our elected officials unwillingness to fix the problem.

As long as we allow politicians to "take care of us", we're going to be disappointed. It's time to start taking care of ourselves.

In some sense yes, especially if "ourselves" is our communities.

But if people are depending on stock returns instead of social security to take care of their retirement, oh well hmm that may have worked for the Baby Boomers, but have you noticed what stock returns have been for the last 10 years or so? It is very doubtful that will work for any generation AFTER baby boomers!!!! A dubious strategy, no where near as secure as social security, but if we can't even get a DINO (democrat in name only) like Obama to stand up for social security(again the Dems most famous program), individuals should take defensive measures, even if they aren't enough. The problem is most people probably even aren't aware enough of what is going on to take these defensive measures. True with people here, I'm probably just preaching to the converted :). Save money etc. :~) Yea, but there are even more reasons to up retirement savings now.

Full disclosure: I dont' save all my money in retirement accounts. No way. I keep a lot outside of it because the job situation scares me a lot these days, and I don't want to be raiding retirement money if I find myself unemployed. Even if what I have in retirement is less and admitedly less than it should be, there is a lot of peace knowing it is dedicated just to retirement (barring some major health crisis or an unfathomably long unemployment of course).

[Zigzagman]

Cutting social security withholdings will only hasten the demise of the social security system. It is already forecast to be insolvent in just over 20 years, so, this will certainly accelerate it's death spiral.

Of course, that's assuming that modifications to the entire system do not take place in a timely manner, and we've already seen that any attempts at this time to deal with the issue ends up being demagogued as "trying to take away your social security benefits". It seems there's no immediate benefit to correcting a long term problem, especially if you can convince enough people that the problem doesn't exist.

I'm very much in favor of people using as much of their available resources to invest in private retirement accounts as a hedge against our elected officials unwillingness to fix the problem. As long as we allow politicians to "take care of us", we're going to be disappointed. It's time to start taking care of ourselves.

The cuts in withholding will have a negligible effect once our economy gets back to "normal" levels and we raise the top income bracket for FICA. My problem is that once something is cut is usually is hard to go back - the "no more tax" crowd will be quick to start their bellyaching, etc.

I think private accounts will destroy the SS system because it is based upon workers of today funding present retirees. "Social Security is the most successful government program in our nation's history", and only needs minor adjustments to fix the problem for the long term.

I say to save the battle for changing our healthcare system (Medicare for all) because the system is broken as it is today. Employer based healthcare is a failed system and that will not change no matter which party is in power.

Peace

[Rogar]

As mishandled and poorly managed SS seems to be, I don't think the general public has the financial savy or discipline to manage a similar retirement safety net as well. My associates who have 401k's have typically invested in higher risk equities, have raided their funds for trivial purchases or unplanned for emergencies (no emergency savings), or spent it down in periods of unemployment. And I would dread to think of putting similar funds into the hands of our private banking institutes (think Citibank or Lehman).

The best solutions I can think of is increased contributions, which doesn't seem popular right now. Or people working a few or many years longer.

A personal favorite would be putting medicare and SS taxes on luxury items, like say, smart phones, cable TV, booze and tobacco. That's probably not going to happen.

[Alan]

As mishandled and poorly managed SS seems to be, I don't think the general public has the financial savy or discipline to manage a similar retirement safety net as well. My associates who have 401k's have typically invested in higher risk equities, have raided their funds for trivial purchases or unplanned for emergencies (no emergency savings), or spent it down in periods of unemployment. And I would dread to think of putting similar funds into the hands of our private banking institutes (think Citibank or Lehman).
Well there ya go. If the government cannot control your retirement savings, then what's a government for? People absolutely must be protected from themselves.

[LDAHL]

As mishandled and poorly managed SS seems to be, I don't think the general public has the financial savy or discipline to manage a similar retirement safety net as well. My associates who have 401k's have typically invested in higher risk equities, have raided their funds for trivial purchases or unplanned for emergencies (no emergency savings), or spent it down in periods of unemployment. And I would dread to think of putting similar funds into the hands of our private banking institutes (think Citibank or Lehman).



It's an interesting and valid question, especially with regard to something like retirement. Can we be wise enough to achieve collectively what we are too foolish/unlucky/etc. to achieve as individuals?

In 1845, Frederic Bastiat said:

"Nothing is more senseless than to have so many expectations on the state, that is, to assume the existence of collective wisdom and foresight after taking for granted the existence of individual imbecility and improvidence".

[loosechickens]

Whether it's FICA, some other tax cut, an unexpected windfall, small or large, our whole lives we have ALWAYS saved them and invested the money. Our budget was always figured on the expected, regular income, so any extra that came in we always considered extra, and treated it accordingly.

So, our behaviors haven't always been good for the economy, if those windfalls were intended at stimulation, but that habit really contributed to us being able to walk away from ordinary lives to adventure at ages 42 and 50, and now at 61 and 69, still have a comfortable retirement.

We're getting kind of off in the weeds into public policy, as opposed to personal finance here, but in a personal finance sense, that "every windfall of any kind, regardless of how small, into savings" has served us well.

These days, now that we are financially secure, fully retired and that is no longer needed to build capital, we still do the same thing, except now we post all those little (and big) windfalls to an account page marked "Windfalls", and use that money for frivolous things that we might not otherwise do, either small things or large things.

Over the past half dozen years, we've chucked in everything from rebates to the Bush tax cut checks, to the one time Social Security $250 check, to sales of already read books on Amazon, and our "frivolous" spending has been so low that the balance has grown and grown, and this Xmas for my 70th birthday, we'll be heading down from L.A. through the Panama Canal to Ft. Lauderdale FL on a 14 day Princess cruise, complete with extra nice room with private balcony, COMPLETELY paid for just by setting aside every cent of unexpected windfalls that came our way.....NOW, of course, it will be quite awhile before that balance grows again, but it's really felt like "free money", and that big splurge didn't have to come out of our regular income or savings.

Well worth it, I think. It's VERY out of character for us, as we've never been on a cruise, and it's not our normal way to travel, but in that 14 days, we'll be celebrating our 32nd anniversary, Xmas/my birthday and New Year's, so for a one time blowout of completely non-environmental living, I guess we'll do it.....a bit guilty, but doing it.