PODCAST: Is a Fix Coming Soon for Social Security?

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Links and resources mentioned in this episode:

• Big Changes Likely for Social Security, Medicare Under a Biden Presidency
• What Is the Social Security COLA?
• More Social Security information from Kiplinger

Transcript

David Muhlbaum: While Social Security won’t ever go broke – and we’ll explain why that is – it faces real funding problems, and the pandemic hasn’t helped things. Catherine Siskos, the editor of Kiplinger’s Retirement Report, joins us to talk about potential fixes and what they mean for your benefits and taxes. We also look into the latest version of buy now, pay later plans, and what to do with an old pair of shoes.

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David Muhlbaum: Welcome to Your Money’s Worth. I’m kiplinger.com senior editor David Muhlbaum, joined by senior editor Sandy Block. Sandy, how are you doing?

Sandy Block: Doing great, David.

David Muhlbaum: I know you and my boss, Robert Long, did a show some time ago on credit versus debit cards. Smackdown, you called it. And that was funny in part because Robert’s fixation on debit cards is kind of a yeah, okay, okay, we know, thing among the staff. But anyway, being old and firmly set in my ways, that is, my way is to use a rewards credit card for just about everything and then I pay it off monthly. And as a result, I feel like I didn’t pay enough attention to something that kind of got big during the pandemic when so much shopping shifted online. I’m talking about these buy now, pay later options, Affirm, Klarna, those sorts of things. Have you used any of those, Sandy?

Sandy Block: Well, now, I am really old because I remember when you would put things on layaway at the local department store.

David Muhlbaum: Oh, that’s still around.

Sandy Block: Yeah, that’s still around. And this is sort of the modern version of that. And I’ve been sniffing around over them, thinking about writing about them for the magazine, because I seem to be hearing about them all the time. And our colleague at The Kiplinger Letter, writer Rodrigo Sermeño, did an item on buy now, pay later for a recent Letter. And it mostly it’s about how they work, which I will summarize for you.

Sandy Block: Basically buy now, pay later is exactly that, you buy now and you pay later, which is something people have been doing since before money, but there’s something new or newish going on here. The credit being extended by these third-party payment processors, not this merchant like I remember, the department store and not your credit card. And that’s a big part of the appeal because you can buy stuff both online and in stores without having to put it on a credit card or having to pay cash upfront. It’s a short-term loan, basically, with zero interest and four payments seems to be the magic preferred number of installments. In fact, there’s one called QuadPay, but you can also customize the terms depending on your credit.

David Muhlbaum: Oh, four easy payments. Okay. I get it. I get it. I get instant gratification. That makes sense. But it also sounds potentially risky. Before we dive too deep into the question of how this works for the consumer, how are these companies getting paid if there’s no interest being charged?

Sandy Block: Well, first of all, I want to remind you that not all of the deals are zero interest, which is why you must read the fine print before you get involved. But their main revenue is from charging the merchants a fee and, in large part because the merchant gets paid right away and the payment firm takes on the risk, they’re glad to pay it. Sometimes there’s a user’s fee. If you make late payments, as I said, there might even be interest. Although notably Affirm, which is one of the biggies in this area, they’re affiliated with Walmart, says it does not charge late fees.

David Muhlbaum: Oh. So I go and buy my $400 of whatever and then I pay when I feel like it? Next year? Never?

Sandy Block: Well, you wouldn’t do that because you’re a good person and also you could destroy your credit rating. That’s really not a good idea.

David Muhlbaum: Good person, that was very generous of you, Sandy. I appreciate you coming through with a compliment this week. Okay. But this still seems like a bit of a conundrum. If I have good credit, why would I use these instead of my credit card? And if I have bad credit, are they even going to let me make four easy payments?

Sandy Block: Well, you’re oversimplifying a little bit. If you’re already happily using credit, keeping down your balance or even better not having one at all, buy now, pay later doesn’t really make a lot of sense. For one thing, you’re giving up some of the really nice perks and protections you get with a credit card like rewards or extended warranties. And as for the bad or maybe we should say, less than good credit person, buy now, pay later is an easier and potentially less expensive way to buy things you couldn’t afford to buy for cash. Because the borrowing amounts are lower, you’re more likely to qualify for these than a credit card. And if you behave and pay on time, you’re improving your credit.

David Muhlbaum: Yeah. Okay. But still the risk of getting in over your head remains. I know I sound like a grumpy old moneybags, but what’s wrong with saving up? That’s as core a Kiplinger principle as I can think of.

Sandy Block: And it’s a really good point. I think when I remember back to layaway, it was the idea that you wanted to do this because it might not be available. You put it on layaway so that sweater would still be there. I don’t think that’s really true anymore.

David Muhlbaum: Playstations.

Sandy Block: Yeah, that’s true. But there is a really good argument to be made that instead of making four installment payments, you just save enough money and then pay for the whole thing. But the way you pay is only part of the question – what you’re buying matters too. Is this going to tempt you to pay more because you don’t have to lay out the cash? And are you buying a new pair of shoes? Or a laptop you need for business? Is it necessity or luxury? That all still applies whether you’re paying up front or in installments.

David Muhlbaum: Huh. Shoes. Funny you mentioned that. I’m going to be coming back to shoes. Well, those I won’t need to put on buy now, pay later, but I do need some winter wheels and tires, the car needs new shoes and that’s a four-figure purchase so maybe I will put that on Affirm to test the process.

David Muhlbaum: Coming up next, the cloudy future of Social Security and whether a new administration and Congress will shine any light on it.

David Muhlbaum: Welcome back. We’re talking today with Catherine Siskos, the editor of Kiplinger’s Retirement Report. We are going to cover what’s a pretty eternal topic, the future of Social Security. Now, the attention people pay to Social Security is usually pretty closely related to whether you’re currently collecting it or about to. For younger folks it’s something far away. They might even have written it off. Kind of, yeah, “Okay, Boomer.”

David Muhlbaum: When it’s a significant source of your retirement income, you watch it like a hawk, which is why it’s such a hot topic for seniors. But the thing is, any changes to the system are much more likely to affect the younger people currently paying in than those already getting payments. Catherine, welcome. And as my very first question, can you give us your best elevator-pitch length version of what Social Security is and how it works?

Catherine Siskos: Sure. And thank you for having me here. Social Security is a social insurance program. It essentially operates a bit like a pension or an annuity in that you pay into this program all your life with payroll taxes while you’re working and then in exchange, when you retire, you get an income stream, a steady, reliable, monthly benefit that you can live on for the rest of your life.

Sandy Block: That’s not too terribly far from what Franklin Delano Roosevelt proposed way back in 1935. Though certainly the tax rates involved have changed. And it’s been working more or less, I think; many people rely on it for a very large portion of their retirement income. What’s the problem with Social Security now, Catherine?

Catherine Siskos: Sure. The problem is that life expectancies have gotten a lot longer and we have fewer people paying into the system than are drawing on it. And as a result, Social Security, which had been tapping its interest to help augment the money that they get from payroll taxes to fund the program, is now, starting this year, 2021, beginning to actually tap the principal of their trust fund. And as a result, if they continue to do that, they will deplete that trust fund by 2034. And that’s even been accelerated a little bit because of the pandemic.

David Muhlbaum: You say, deplete, not go broke. Social Security is not going broke. That’s just a shorthand that people toss around, right?

Catherine Siskos: Exactly. It will be a shortfall. Social Security will never actually go broke because remember, we have payroll taxes that fund it, so it’s always actually collecting some kind of money. The problem is that those payroll taxes aren’t sufficient enough to pay all of the benefits that we are currently paying out.

Sandy Block: Catherine, I heard you mention the pandemic. How does COVID-19 play into this problem?

Catherine Siskos: When you have job losses, people working fewer hours, slower wage growth, all of these things reduce the amount of payroll taxes that are being collected that help fund the program. There’s less money going into the system, even how we do stimulus plays a role. When it’s done with direct payments, relief checks, Social Security isn’t going to get its cut.

David Muhlbaum: Okay. The problems are a bit more acute than they’ve been, but the date that Social Security depletes is still over 10 years away. What are the chances of a fix now? Actually let’s back up. How do we fix the problem with Social Security?

Catherine Siskos: Yeah. Fixing Social Security is a math problem. We can fix it in a couple of ways. We can cut benefits, we can add revenue, or we can do some combination of both. We can also look at what’s really likely to happen right now. First of all, any changes in benefits for retirees who are already receiving them or about to start collecting them, that’s not going to change. It’s really future generations that would have to bear the burden perhaps of either reduced benefits or potentially a higher retirement age.

David Muhlbaum: Yeah. Because the first thing you spoke of that’s the quote unquote third rail: cutting benefits.

Catherine Siskos: Absolutely. Absolutely. This is not something that politicians really like to tackle because of course, retirees are active voters. They’re the ones who reliably turn out for elections and politicians do not want to raise their ire, especially because retirees really believe in Social Security, rely on it and want to make sure that it’s there.

David Muhlbaum: Instead, raise the taxes on the people paying it. That’s how it’s been done in the past, right?

Catherine Siskos: Exactly. Historically, one of the ways that they do that is to boost the payroll tax rate, currently employees pay Social Security tax of 6.2% and employers also pay 6.2% on the employee’s salary. It’s a total of 12.4%. self-employed workers, of course pay both the employee and employer share. There’s legislation in Congress that would gradually raise the total tax rate by 0.1 point per year, over 24 years so that employers and employees would eventually each pay 7.4% for a total of 14.8%.

David Muhlbaum: That’s a lot of numbers. Now you said over 24 years. I guess part of the thinking there from Congress is that by the time it matters they’re maybe not even in Congress anymore.

Catherine Siskos: That’s part of it. But of course also it’s a gradual increase. You’re not actually paying that additional 7.4% in a single year. It’s happening, it’s a gradual increase over those 24 years. I guess the hope is maybe you won’t notice it quite as much when it’s spread out over that length of time.

Sandy Block: Catherine, another thing that seems to have a fair amount of support, because maybe it wouldn’t be as noticeable if you’re not wealthy, is the increasing the amount of wages that are subject to payroll taxes. Can you explain how that might work?

Catherine Siskos: Yes. Right now, each year Social Security sets a limit on how much of each workers’ wages are taxed based on average increases in wages. For 2021, that cap is $142,800. And President-elect Joe Biden is talking about raising that cap to $400,000. That would actually bring in more money, but it wouldn’t necessarily fully fund Social Security for the long term. Some estimates are saying that it would only extend Social Security’s life by another five years.

David Muhlbaum: That alone is not enough. What are the other things in play?

Catherine Siskos: The other things in play are, as we mentioned, increasing the amount of the payroll taxes for both the employee and the employer. That was actually a bill that was proposed by Representative Larsen in 2019. He’s a Democrat. And it’s one that does not have bipartisan support, but is what the Democrats are probably looking at. That would actually fund Social Security for 75 years.

Sandy Block: Okay, so Catherine, I guess the other way that they’re looking at, how would they go about raising the full retirement age, if that’s on the table?

Catherine Siskos: That’s probably not on the table, quite frankly. For one thing, it’s a lot more controversial and for another when you raise the full retirement age, at least the way our Social Security system works in this country, you are essentially minimizing, reducing the benefits for that generation whom you’ve raised the age for, regardless of when they claim Social Security. Essentially raising the age is the same thing as reducing benefits.

Sandy Block: Catherine, another thing that’s been knocked around is changing the cost of living adjustments, which have been pretty meager the last few years.

Catherine Siskos: Yes. In fact, in the last decade, we had three years where we had no cost of living adjustment and on average they probably run about one to 2% a year. Of course, in 2021, checks are increasing by 1.3%. Each year Social Security calculates its cost of living adjustment. These are called COLAs for their benefit checks based on the consumer price index for urban wage earners and clerical workers also known as the CPI-W. But some proposals call for linking COLAs to a chained CPI, which accounts for changes in consumer spending patterns as prices increase. If beef prices rise, for example, consumers can always go buy hamburger instead of filet mignon. Generally chained CPI rises less over time than the CPI-W, and Social Security estimates that switching to the chained index would shrink the annual COLA by an average of 0.3 percentage points and reduce the program shortfall by 19% over 75 years.

Catherine Siskos: But there’s also another idea as well. President-elect Biden has also considered giving COLAs a lift by pegging them to a different index. This is the consumer price index for the elderly, the CPI-E and this index emphasizes expenses that seniors tend to have more. It weights those expenses higher. Things like healthcare and housing. Social Security estimates that switching to the CPI-E would increase annual COLAs by an average 0.2 percentage point. But that of course would also cause a 13% increase in Social Security’s shortfall over 75 years.

David Muhlbaum: That’s the opposite direction. That would then make the Social Security problem worse.

Catherine Siskos: Exactly. The thinking is to make that up with higher withholding that we talked about earlier. In short, it’s a more generous Social Security that’s also more funded, but Biden wants to expand Social Security in two ways. He would raise benefits for the people most in need. He’s looking at low wage workers, surviving spouses, dual earner couples, caregivers, government workers and those who have been collecting Social Security the longest. What’s the rationale for that? Well these seniors have higher medical and long term care expenses later in life.

David Muhlbaum: All right. We’re recording the day after Georgia’s Senate runoff elections with the likely outcome of those two Democratic wins. That in turn means Democratic control of the Senate, House and presidency. Catherine, or Sandy, there’s going to be a lot of enthusiasm to do stuff. Will Social Security be part of that?

Catherine Siskos: Certainly there are some small things that they can do. Remember that the Democrats still have a very narrow majority so we may not still be talking very big picture items, but one of the things that they could tackle is reinflating the Social Security benefits for people who were born in 1960 or 1961. Their benefits were cut unintentionally by a formula glitch in the 2020 recession.

Sandy Block: Right. And Catherine and I have both written about this. It affects a fair amount of people and it’s because Social Security benefits are based on your 35 highest years of earnings, which are then indexed to the growth in average wages until the year you turn 60. Which is a problem for people who turned 60 last year, even if their earnings were unaffected by the pandemic, because the economic downturn is expected to sharply reduce average wages, which will drag down the index. And as I said, this could affect about three million people and cost them about $2,500 a year in benefits. That’s no small thing when you think about how much people depend on Social Security and it’s purely a function of the year that you were born, which I think a lot of people would consider very unfair.

Catherine Siskos: Exactly. And I think members of Congress would feel that way too. And as I pointed out before, older voters are more conscientious about voting and politicians hear from them. This is something that politicians are probably not likely to let stand. They will try to do something to fix it.

David Muhlbaum: And that we might describe as low-hanging fruit. What do you think the chances are that in the next couple of years, they’ll go bigger than that? Or address some of the issues we’ve floated today?

Catherine Siskos: A lot really depends on the composition of Congress and who has control and which party and then what kind of advantage they have in terms of numbers, how much control they have basically. That’s really going to determine the solutions that get proposed and the solutions that also get passed.

David Muhlbaum: It could come down to the number of votes on any given proposal then.

Catherine Siskos: Exactly.

David Muhlbaum: Well, thank you very much for being with us today, Catherine. I’ve learned a lot.

Sandy Block: Me too.

David Muhlbaum: Yeah, thank you for joining us.

Catherine Siskos: Thank you.

David Muhlbaum: In the pandemic, the running joke is that no one wears pants anymore because everything’s done from the waist up on Zoom. That’s not actually true of course, since plenty of people have to go out and a lot of the rest of us have family members who would rather have us fully clothed. But seriously, how about shoes? We were doing a little bit of cleanup the other day and I looked at all these dress shoes I own and I thought, wow, long time no see.

Sandy Block: I know. I know my husband got me a pair of nice slippers for Christmas and I have not taken them off except to take the dog out and go running.

David Muhlbaum: Right but you have nice slippers so that counts. Yeah.

Sandy Block: Very nice.

David Muhlbaum: And running shoes. Yeah. Those I’ve actually bought some new ones of because they wear out. But this got me thinking about what the pandemic might’ve done to the handcraft that I’ve always admired: cobbling.

Sandy Block: Oh yeah.

David Muhlbaum: Yeah. Fixing shoes. Cobbling was already in sort of a weird state of affairs. It was seen as a dying art with no new people coming into the business.

Sandy Block: Right. Because shoes are cheap. A lot of people would just throw out their shoes and get new shoes.

David Muhlbaum: Right. And there was this sort of holdout group, which I’m essentially part of, who would fix some or get some of their shoes fixed. But so there was already this tension and the field was already in flux. But man, I did a little looking around both for what happened to my old cobbler downtown and what happened to the industry in general and it’s not pretty.

Sandy Block: Oh, I bet. I bet. That’s a shame.

David Muhlbaum: Yeah. Because A, it’s a small retail business. B, to the extent that they were getting business, it was largely from people in urban areas wearing higher end shoes to the office and work boots. But both are not getting the...

Sandy Block: The mileage.

David Muhlbaum: Not getting the mileage that they did and therefore not getting the demand and a variety of problems. I went looking online for what the heck I could do, because that seemed like the very modern solution to this problem. And it turns out there’s a rather robust industry for fixing shoes online. For essentially getting your shoes cobbled online. And in this day and age they’re taking full advantage of the internet for uploading pictures, but also they’ll do a Zoom with you. You can show them the shoe and talk about what you want done. In my case for these desert boots that I’m thinking about – if I’m going to invest the money, I want it to be good. And so turns out, you can pick the color of the sole.

Sandy Block: Wow.

David Muhlbaum: And that sort of thing and you can really, you can get into it. The consequence of that is, it ain’t cheap!

Sandy Block: Well that was going to be my question. How much does this cost? Because obviously there’s going to be some shipping perhaps also, I don’t know. Is it worth it?

David Muhlbaum: Well, that’s just the question. Is it worth it? For these desert boots, which are at least 25 years old and a little bit dry, but well, they’re desert boots. But anyway, so the quote I got from this outfit was whose name I can’t remember off the top of my head, but maybe I’ll put it in the link, was $119.

Sandy Block: Oh my goodness.

David Muhlbaum: Which was more than the shoes cost, but that was 25 years ago so that led me to do a little bit more sort of informal market research, if you will. And a new pair of these that looks similar and also have colorful soles is $137. But then you bring in all these other questions, when you start thinking about it. My younger daughter, to her credit, has been writing about the question of fast fashion for her school papers.

Sandy Block: Which I’m very interested in, yes.

David Muhlbaum: Yeah, stuff made cheap, turned around fast and you wear it and you chuck it and goodbye.

Sandy Block: And it’s in a landfill, yeah.

David Muhlbaum: With all the environmental and other consequences that come with that. She’s very gung-ho on the idea of me resoling them, but when it costs the same as a new pair....

Sandy Block: Yeah. Yeah. And I think that’s why a lot of these businesses, some of these, although it sounds like the one you went to was doing pretty well, but a lot of these businesses were struggling even before the pandemic, because oftentimes it’s why there’s no TV repairman. You just chuck your TV and get a new one when the TV goes on the fritz. And I think the appeal maybe is something that’s so high end and maybe that’s where cobblers still make their money is it is worth getting it done. But I think in a lot of cases, the math just doesn’t work.

David Muhlbaum: No, I think, maybe it’s going to be a question of in part, the snob appeal of someone who’s a shoe hound looking at my shoes and going, “Oh yes, yes, yes. He knows. He understands.”

Sandy Block: Vintage.

David Muhlbaum: Yeah, vintage. Vintage, exactly. Well, if I get really ambitious, maybe I will put both the old shoes, what they would look like, who would fix them and the new comparison up on some kind of vote platform. Can do a SurveyMonkey and I’ll post it in the show links.

Sandy Block: That’s a good idea. Because, I’ll just say this last thought is, I am totally in your daughter’s camp and I’ve bought a lot of clothes from places like Threadup and the RealReal, which are consignment used clothes. And I’m real happy doing that, but I would not do that with shoes. I just would not be comfortable buying somebody else’s shoes. You don’t really have the solution for your boots of buying used shoes, which make you feel better about the waste.

David Muhlbaum: Yeah, no, that’s a good point. Especially with, we’re getting into the details of shoe structure now, but with a leather shoe that essentially takes a set to your foot, there’s a functional thing. It’s not just “Eww, someone else’s shoe,” there’s the functional thing of: Will it fit? But I will tell you where that does not apply, is Crocs.

Sandy Block: They fit everybody? Or are you saying you buy used Crocs?

David Muhlbaum: I have bought used Crocs.

Sandy Block: Oh my gosh.

David Muhlbaum: I have bought a smashing pair of yellow used Crocs at a Goodwill. I was with my daughter. A smashing pair of yellow used Crocs, which are really the peak dad shoe, but in the process, and I have not pulled the trigger yet, but in the process, I have become a little bit of an aficionado of vintage Crocs.

Sandy Block: Oh my gosh. Had no idea there was such a thing.

David Muhlbaum: You can spend three figures on this stuff. Really the point is how ugly they are. It’s kind of like the whole ugly sneaker thing, the worse, the uglier and the rarer they are, the more you can pay. I might dabble in this just to horrify the family.

Sandy Block: We are going to have to see some pictures if you dare.

David Muhlbaum: Yes, I will.

David Muhlbaum: And that will just about do it for this episode of Your Money’s Worth. If you like what you heard, please sign up for more at Apple Podcasts or wherever you get your content. When you do, please give us a rating and a review. If you’re already subscribed, thanks. I hope you’ve added a rating or review as well. To see the links we’ve mentioned on our show, along with more great Kiplinger content on the topics we’ve discussed, go to kiplinger.com/podcast. The episodes, transcripts and links are all in there by date. And if you’re still here because you want to give us a piece of your mind, you can stay connected with us on Twitter, Facebook, Instagram or by emailing us directly at podcast@kiplinger.com. Thanks for listening.