Weekend Edition: You’re Not Legally Entitled to Social Security

By Justin Spittler

Tom Dyson, co-founder of Palm Beach Research Group, thinks that’s a dangerous assumption. In today’s essay, Tom explains why the government could “terminate” your Social Security money without warning.

The good news is that there’s another option. Tom explains how to defend yourself against this threat.

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You probably thought Americans had a “right” to collect their Social Security in old age, right? Most people see Social Security as a contract between themselves and the government. You pay money into the system, and the system pays it back at a later date—guaranteed by law.

But nothing could be further from the truth..…

You have no choice when it comes to paying your Social Security tax. It comes out of your paycheck automatically. But did you know the government isn’t under the same rigid contract? In fact, by ruling of the United States Supreme Court, the federal government is under no obligation to pay you a Social Security check.

This is the clear precedent set in the case of Flemming v. Nestor.

Ephram Nestor was an immigrant from Bulgaria. He moved here in 1918 and paid Social Security taxes from the very beginning of the program in 1936. In 1955, when he retired, Nestor began receiving Social Security checks for $55.60 per month. But, just one year later, Nestor was deported. Turns out, he’d been an active member of the Communist Party in the 1930s, giving the U.S. government grounds to kick him out.

When he was deported, his Social Security checks stopped. Nestor sued the U.S. government, arguing that, since he had paid money into the program, he had a right to those benefits. The Supreme Court ruled against Nestor, saying the government had the right to terminate Social Security at any time.

The people who sign the Social Security checks sum it up this way:

[Nestor] appealed the termination, arguing, among other claims, that promised Social Security benefits were a contract. In its ruling, the Court rejected this argument and established the principle that entitlement to Social Security benefits is not a contractual right.

Takeaway: You have no contractual right to Social Security.

That historical precedent means it has the power to cut Social Security anytime it wants. It could end tomorrow, and there’s nothing you can do about it. (Interestingly enough, the SSA has a full page on its website devoted to the Nestor case.) Now, this doesn’t mean the government will suddenly stop paying Social Security benefits. Not now, anyway. (Suggesting an end to this system is political suicide.) But the risk, as unlikely as it seems, is possible.

Meanwhile, recent signals from the U.S. government are foreboding. On November 2, 2015, Congress and President Obama already struck down two massive Social Security loopholes called “File and Suspend” and “Restricted Application.” For some, these rule changes cut up to $60,000 of Social Security benefits over a retiree’s lifetime starting in April of this year.

Could these cuts be just the beginning?

I think so. You see, no politician wants to let Social Security cuts dominate the conversation during an election year. That’s why the government is working on all kinds of sneaky and indirect ways to pay out less money in benefits. It has to do with COLA (cost-of-living adjustment).

I won’t get into all the details here, but know this.....

A small clause in the Social Security Act says that if there is no cost-of-living adjustment for Social Security, then, by law, Medicare premiums can’t be raised for the majority of middle- and lower class Americans. Instead, 3.1 million select Americans will absorb the full increase. If you’re one of them, you’ll see Medicare premiums rise 52%.

In some cases, you could lose as much as $4,200 in 2017 alone..…

That’s like having nearly three months’ worth of Social Security benefits ripped away from you. What we have here is a Social Security cut disguised as a Medicare cost increase. If you’re affected, your Social Security money is going to be taken away from you to subsidize health care coverage for lower income Americans. I think this could be one of the first changes coming immediately after the 2016 election.

Bottom line: If you’re not actively working on a plan B for the coming Social Security cuts, you should be. Congress has just given a couple of big hints of what’s to come in the months, years, and decades ahead.

Good investing,
Tom Dyson

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Editor’s note: For years, retirees have relied on three main sources of income: pension plans, Social Security, and personal retirement accounts such as 401(k)s.

Unfortunately, this model is on the verge of complete collapse..…

To help you protect your wealth, Tom and his colleagues are putting on a first-ever Retirement Rescue Round table this Tuesday. Their entire team of experts will be there—including Doug Casey’s longtime friend and colleague, Mark Ford.

To learn more about Tom’s retirement strategy, click here to watch this free video.

The article Weekend Edition: You’re Not Legally Entitled to Social Security was originally published at caseyresearch.com.

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The Biggest Trade Ever....No Exaggeration

By Jared Dillian

I won’t keep you in suspense. The biggest trade ever is in demographics. In particular, our rapidly increasing life expectancy.

Quick story. My Coast Guard friends are retiring now. You get to retire after 20 years of service, but some of them have been taking advantage of early retirement and are leaving the service as young as age 40.
Oh my God, what a deal: At age 40, you can bring home about $50K a year and then start a whole new career on the side!

In the old days, you could offer that deal because military folks would die at 47. Now they will live to 100.
Paying out benefits for 60 years to retired military personnel doesn’t sound like a great deal for the taxpayer.
Of course, the military pensions are just the tip of the iceberg. To receive Social Security, you can retire at age 62 (or 67 for full benefits). Again, that’s fine when most people die before 62. The blended life expectancy (for both men and women) is almost 79 years and trending higher.

Or my favorite chart on life expectancy ever, also a rebuttal to those who don’t like capitalism.

If you pay attention to Silicon Valley stuff, you know that Google and Ray Kurzweil and some other folks are working on projects that will allow us to live to 150 or even beyond. That would involve doing a couple of things, first

1. Curing cancer
2. Curing heart disease
3. Curing Alzheimer’s disease

You do these three things, it increases life expectancy by another 10 years or more. And we are actually doing those things!

Once you have a cure for all known diseases (attainable in my lifetime), then you have a different problem. Cells get old and die. The Silicon Valley folks are working on that too. Funny, if you don’t smoke, eat right, and get a little exercise, you will pretty much live to 80, no matter what. What happens beyond that is up to genetics, which we will solve one day. So what will the world look like if people live to 100, 150, or more?

It Looks Like Greece

Greece’s retirement age (to receive benefits) used to be 55 years. Again: retiring at 55, what a deal! I would only have 14 more years to go. People are pretty healthy at 55 (though maybe not the Greeks—they have the highest rate of tobacco use in the developed world).

So if people live way longer than the retirement age, the Social Security system goes kablooey. It just does. And yet people resist all attempts to reform it. We know Social Security is in trouble. George W. Bush tried to tackle it. For all his faults, it was the right thing to do. But he got laughed at.

The first thing we will do is to means-test the benefits, which will just make it more progressive but won’t solve the actual problem. You need to push back the retirement age, like, to 80.

But wait a minute. There aren’t even enough jobs for people to work until age 80.

I know…..

The World Was a Lot Simpler When People Just Died When They Were Supposed To

We’re going to look back at the 1940s-2000s as an exceptional period in economic history—with high, virtually straight line, uninterrupted economic growth. We had debt problems before, but biology has made them intractable.

In fact, the whole profession of economics is based on the very idea that there is population growth and inflation. What happens if birth rates decline? They are. Population growth rates will peak very soon. (By the way, the old Malthusian idea of overpopulation is being discredited.) What does the profession of economics look like with declining populations, people living longer, a dearth of unskilled jobs?

Is it nonstop deflation?

Many economists predict years of global deflation based on this premise. They say that you should buy bonds at any price. It’s a compelling argument. I think we’re going to learn a lot of really interesting things about money velocity in the coming years.

The Trade

Like tech in the ‘90s and energy in the 2000s, health care has been and will be the trade of the 2010s. You have the happy accident of huge technological advances and a government that seems willing, for the time being, to pay for it all. You hear some squawking about the cost of some treatments, but seriously, if you can cure cancer for $250,000, who is going to say no? Especially when that person’s chemotherapy, radiation, and hospital bills could easily exceed $2,000,000.

Lots of folks thought that Obamacare would tomahawk the health care sector. In classic market fashion, it has done the exact opposite. The insurers in particular have been the biggest beneficiary. You probably saw the recent Aetna/Humana merger.

People have tried for years to short biotech. Hasn’t been fun for them.

People have funny attitudes about death, you know. You ask someone if they’d like to live to 100, 120. “Noooooo,” they say. “I wouldn’t want to just sit in a chair.” Me, personally, I’d be okay with sitting in a chair. But the point of these treatments is that you can be active into your 100s. What then?

“I don’t know…” they say.

Are you kidding me? Forever young, my man. I’m 41, and I look a lot younger than my parents at the same age (sorry, Mom and Dad). I’m still DJing parties, for crying out loud.
Still don’t get the point of Snapchat, though.

Jared Dillian

The article The 10th Man: The Biggest Trade Ever (No Exaggeration) was originally published at mauldineconomics.com.

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A Million Dollars Isn’t What It Used to Be

By Dennis Miller

We all share a common goal: to grow our nest eggs and make sure they last over the long haul. Our generation was taught to live off the interest and never touch the principal, but interest rates for CDs and Treasuries no longer allow for that. Frankly, they don’t even keep up with inflation, so we have to invest our money elsewhere if we want it to last.


It is a challenge to keep up with inflation and earn enough income to supplement our Social Security. Also, when our respective parents died, my wife and I each inherited a bit of money to add to our retirement fund, and we hope to do the same for our children. Many of you likely have a similar goal.

In 2007, an investor with $1 million could earn $60,000 annually on a certificate of deposit. Today, that same CD would earn $12,000, which makes things a lot more difficult. We will use $1 million in our examples simply because it’s an easy number to follow and do math with in our heads. However, the principles we’ll discuss apply no matter what size your retirement portfolio happens to be.

The Old Rule of Thumb

 

Back in the good old days, there were four estimates that worked well for conservative retirement planning:

1. Return on your portfolio: 6%
2. Inflation rate: 2%
3. Age your money needs to last to: 120 years old
4. Percentage of your portfolio to invest outside of CDs and high-quality bonds: 100 minus your age at retirement

Will 100 Minus Your Age Work Today?

 

A retiree who invests 65% or more of his or her nest egg in Treasuries or CDs will not earn enough to keep up with inflation, let alone pay the bills. Furthermore, while fixed-income investments were once considered safe, they carry significant risk, as rising inflation rates could destroy their value. So, retirees are under a two-sided attack.

How Should We Factor in Inflation?

 

This is really a twofold question: what is the inflation rate; and how does it affect our personal buying power?
Regardless of what the inflation rate is, to maintain the buying power of our nest egg, our principal must be adjusted every year. If we have $1 million and plan for 4% inflation to leave a little room for error (that’s a little over twice the official September 2013 annual rate), we need to earn $40,000 at the end of the year to cover inflation. Anything above that is supplemental income, or we can keep it in our portfolio.

There has been a lot of discussion about what the real rate of inflation actually is. The Bureau of Labor and Statistics’ (BLS) formula is quite complicated, and takes into consideration housing costs, food, and health care, etc. However, the BLS inflation rate can seem irrelevant when your costs are increasing much faster than it suggests they should.

In our reader poll, folks estimated their personal inflation rate at 8.1%, on average. Using that number, you would need to earn $81,000 on $1 million dollars just to stay even. Depending on your personal expenses, inflation will affect you differently. So, take a good look at your expenses and find a reasonable rate that suits the rising costs in your life.

Inflation varies from year to year. Most folks think the increase to our 2013 Social Security checks did not even come close to covering the true inflation rate for 2012. While inflation over the last 30 years may have been 2-3%, it is much better to err on the side of caution. I’d rather overshoot the number than not. So, set a reasonable inflation target that’s somewhere above the official 2.0% rate.

Personally, I believe there is a commonsense rule that applies. A few years ago my wife Jo and I had a terrific year, with overall returns in excess of 25%. When that sort of windfall occurs, a retiree who wants to stay retired will use some common sense and not go on a spending binge. They will take out only what they need to meet regular expenses and leave the balance in their portfolio to grow. When a lean year comes along, we may fall a percent or two short. Life is much less stressful if during most years we bank a little extra to build a cushion.

What About 4% to Supplement Your Income?

 

Unlike inflation and CD rates, there are some variables over which we do have control. Income and 4% are great examples.

Many baby boomers and retirees are choosing to exercise caution here. I recently heard of a baby boomer who sat down with his analyst and saw that while he had enough money to retire, it would be close. He enjoyed his job and wanted to enjoy retirement without worry, so he decided to keep working for a couple of years to build up a cushion.

In addition, a lot of retirees are now back in the work force. While some may have to work in order to put food on the table, others have simply taken part-time employment doing something they enjoy. A friend of mine who needed a new car decided to go back to work to pay for it instead of taking the money out of his nest egg. He didn’t have to, but thought it better to err on the side of caution.

During the first few years of our retirement, taking out 4% to cover living expenses was no problem at all. Now I see lots of folks, Jo and myself included, who are looking at expenses much more critically. They are cutting back on a lot of things that really don’t affect their lifestyle. Maybe we don’t need to pull out 4% anymore.

As an illustration, we used to have XM radio. It was cool because we could listen to ‘50s and ‘60s music without a bunch of CDs falling all over the place. When we bought it, it was $9.95/month – no big deal. Now it is close to $15/month per vehicle. My son pointed out I could download all of our music onto our cellphones, and it can play through the Bluetooth on the radio. Now we sing along to the same music without the monthly cost.

Controlling Financial Risk

 

If you feel extremely behind in your retirement, you may have made some mistakes in the past. However, remember there’s only one thing worse than making one big mistake – it’s making two big mistakes.
We cannot put more of our life savings in high-risk investments to try to pick up the slack. That is like a gambler doubling his bet to make up for his losses – and we all know how that story ends. We are at a point in life where a do-over is unlikely. The consequences of losing a major portion of our nest egg are too catastrophic to justify foolhardy risks.

So, while it’s tempting to play catch up by taking on more risk, we recommend staying safe instead of possibly getting yourself in even deeper trouble. You may have to adjust your lifestyle a bit, but that is much better than losing a major portion of your life savings to a poor investment decision.

Some of my Money Forever regular readers are already retired and some are a few years out. Either way, they have all committed the time and resources necessary to become their own money managers—to continually learn more about handling their money. Remember: no one has more of a vested interest in you getting this right than you do.

From the very first issue of Money Forever our goal—my mission­­—has been to help those who truly want to take control of their retirement finances. I want our subscribers to have more wealth, a better understanding of how to create an income-producing portfolio, and confidence their money will last throughout retirement.

With that in mind, I’d like to invite you to give Money Forever a try. The current the subscription rate is affordable – less than that of your daily senior vitamin supplements. The best part is you can take advantage of our 90-day, no-risk offer. You can cancel for any reason or even no reason at all, no questions asked, within the first 90 days and receive a full, immediate refund. As you might expect, our cancellation rates are very low, and we aim to keep it that way. Click here to find out more.


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