Tuesday, January 19

Retirement: The Social Security Time Bomb

Co-produced with Treading Softly

Here at High Dividend Opportunities, we aim to keep our eye on the horizon, much like a Minesweeper vessel must always be aware of the risks that lay just below the waters.

Source: Navylive

As such we need to alert retirees and those planning their retirements to a major risk ahead.

Before COVID-19 hit everyone’s radar, the Social Security Administration released their near-term and long-term reports. In 2010, they raised a red flag:

Currently, the Social Security Board of Trustees projects program cost to rise by 2035 so that taxes will be enough to pay for only 75 percent of scheduled benefits. This increase in cost results from population aging, not because we are living longer, but because birth rates dropped from three to two children per woman. Importantly, this shortfall is basically stable after 2035; adjustments to taxes or benefits that offset the effects of the lower birth rate may restore solvency for the Social Security program on a sustainable basis for the foreseeable future. Finally, as Treasury debt securities (trust fund assets) are redeemed in the future, they will just be replaced with public debt. If trust fund assets are exhausted without reform, benefits will necessarily be lowered with no effect on budget deficits.

Source: SSA

Social Security is designed to replace approximately 30%-40% of one’s pre-retirement income. However, a large portion of retirees relies heavily on Social Security income. According to another SSA report, the dependence on Social Security in retirement is enormous!

  • Among elderly Social Security beneficiaries, 50% of married couples and 70% of unmarried persons receive 50% or more of their income from Social Security.
  • Among elderly Social Security beneficiaries, 21% of married couples and about 45% of unmarried persons rely on Social Security for 90% or more of their income.

Source: SSA Fact Sheet

What’s Causing The Issue?

Before we dive into solutions or steps to avoid this problem, we need to take a minute to examine why it’s occurring.

Firstly, Social Security’s payout is funded via taxes. As more retirees start collecting payments, those have to be funded from new tax money rolling in and/or Social Security’s vast reserves.

The issue that’s occurring in the formula is that Social Security currently depends on the average birthrate being three children per family. It’s important to note from the first quote above that long lives is not draining Social Security badly, but that the lower birthrate is to blame.

Historically, US families had a high birthrate. This produced a large pool of workers. Now it’s falling below three children per family, or more importantly per woman.

The report quoted above is from 2010. Birthrates have only continued to decline in the US.

The report on provisional data from the Centers for Disease Control and Prevention indicates notable birth and population measures reached record lows in 2019. American women, for example, are now projected to have about 1.71 children over their lifetimes – down 1% from 2018 and below the rate of 2.1 needed to exactly replace a generation.

Source: US News & World Report

Immigration also plays a role in this as well. Immigration has been a crutch on which declining birthrates have been supplemented with legal immigration. Young immigrants actually benefit Social Security instead of hurt it. The reason being is they work for many years before drawing benefits and cannot draw benefits until they have worked at least 10 years paying into the system.

Immigration during COVID-19 has come to a stand still and birthrates have not recovered. Social Security’s formula for long-term viability is at risk.

The second issue is unemployment. Social Security depends on working people to pay into the system so it can pay out to retirees. Before COVID-19 the United States had reached what was deemed “full employment.” Now with the economy suffering from shutdowns and stay-at-home orders, more Americans are sitting on the sidelines, many not by choice. This reduces the money coming into Social Security and forces it to draw from its reserves more rapidly.

It’s extremely unlikely that Social Security will be able to maintain its full payouts until 2035. In 2010, they were raising alarms. They had no idea COVID-19 was coming, that immigration would stall, and that birthrates would continue to downtrend.

So the deadline has likely been pushed closer due to dropping birth rates, lack of immigration and now lower employment rates due to COVID-19, whereas in 2010 when the 2035 date was created we were in “full employment” and slightly higher birth rates / immigration levels.

You need to take steps to avoid a massive income hit. SSA has stated it would need to cut payouts by 25% in 2035 unless something changes. More babies. More immigration. Higher taxes. Likely, the first two will remain low, meaning the third will be more probable. However, Congress has historically waited until the 11th hour to pass legislation to attempt to fix the issue. Why? No matter how you try to fix the problem, some group of people is taking a hit. Raising taxes dis-proportionally hurts the young. Cutting benefits hurts retirees. Raising the minimum retirement age hurts anyone not retired.

So you need to take some steps on your own.

Build An Income Stream of Your Own

It’s time to dust off your math skills and build an income stream of your own. The average SS monthly payment is $1,513 monthly or $18,156 annually. It’s estimated the average retiree may see a reduction in annual benefits of 25%, or $4,539.

To replace this amount of annual income, you could buy dividend or interest-paying securities now to generate an income stream to offset this cut. How much would you need to save to replace the cut? It all depends on the expected yield.

YieldAmount Need to Save

As you can see, investing in low-yielding securities will require almost the average retiree’s entire retirement savings to offset an annual loss of $4,539.

The High Dividend Opportunities model portfolio yields between 9%-10% and our Baby Bonds have a 7% average yield for more conservative investors. To save $65,000 by 2035, a retiree only needs to save $362 monthly. By factoring in a 7% yield over those 15 years, you only need to save $204 a month to reach your $65,000 goal.

If you’re able to save more – $362 monthly over the 15 years at 7% yield, you would have over $115,000 in your portfolio allowing you to step down your yield if desired when the Social Security cut comes.

To keep your income as safe as possible, buying baby bonds or preferreds can keep your income generation as easy as possible with low effort.

Consider some of these options:

  1. RLJ Lodging Trust, $1.95 Series A Cumulative Convertible Preferred Shares (RLJ.PA) yields 8.6% and hasn’t missed a beat in years. Furthermore, it’s un-callable and does not mature. Buying this preferred security allows you to generate income for many years without needing to make adjustments.
  2. Crestwood Equity Partners LP, 9.25% Preferred Partnership Units (CEQP.PR) yields 13.4% and issues a K-1 at tax time. This partnership preferred is similar to RLJ-A in that’s does not mature and cannot be called. While it’s more volatile than RLJ-A or a baby bond, it compensates investors by offering a higher yield and very friendly terms for investors. If Crestwood Equity Partners (CEQP) ever misses a preferred payment, the yield climbs higher. CEQP has solid coverage on their preferreds and no signs they will miss a payment.
  3. Sachem (SACH) offers a pair of baby bonds maturing in 2024. They are Sachem Capital Corp., 6.875% Notes due 12/30/2024 (SACC), and Sachem Capital Corp., 7.125% Notes due 6/30/2024 (SCCB). Both currently are trading just below PAR but yield over 7%. These baby bonds mature before our 15-year horizon but will give us the yield we want and a small boost in total dollars at maturity – helping us reach our overall goal. We would then reinvest those dollars into new opportunities at the time.

Alternatively, you can consider buying a preferred stock closed-end fund that can give you exposure to hundreds of individual preferreds and therefore instant diversification. We have been recommending those to our investors too. A great CEF that I personally have a large position in is John Hancock Preferred Income Fund (HPI) with a generous yield of 7%.


The looming benefits cut continues to approach. We strongly feel that COVID-19 has brought it closer to reality. While 2035 feels like a long way off, for many retires 25% of their income may be affected and the impact will be financial hardships.

By taking proactive steps now, you can remove the impact of this cut and have a stronger independent financial situation. We always are happy to help you discover new baby bonds and preferreds which we hold in our Model Portfolio and have discussed actively in our chat rooms.

Today is the day to prepare and build a high-dividend portfolio for sustainable income.

Beware! There’s a mine ahead! Let’s dodge it together.

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Source: Seeking Alpha

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