Ep. 216: Social Security, Finance Professionals, Replacing Debt with More Debt – Transcript
Tom Mullooly: Welcome to the Mullooly Asset Management podcast. This is episode number Cleveland, area code for 216, back from my cold calling days in the ’80’s where I learned the area codes for every part of the United States. I’m Tom Mullooly, and with me is Brendan Mullooly.
Brendan: Ready to get into it. What are we talking about this week?
Tom Mullooly: I think we’re going to talk a little bit about home equity loans. I think the hot topic today has been social security because we started talking about this in this morning’s meeting. I think this is something that is worth talking about. I think our listeners could really … It would be good to share at least what we’re thinking about it, and not necessarily the timing of, hey do we accelerate our, you know start taking the checks early, do we defer. That’s a really-
Brendan: That’s a personal decision that you have to make on your own terms. There’s no right or wrong answer.
Tom Mullooly: Yeah. What we really want to talk about is ‘how are we going to fix it’? Or does it need fixing at all? Some ideas, maybe some myth busting too.
Brendan: Let’s get going then with episode 216.
DISCLAIMER: Tom Mullooly is an investment advisor representative with Mullooly Asset Management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Mullooly Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Mullooly Asset Management may maintain positions in securities discussed in this podcast.
Tom Mullooly: One of the things that I’ve thought about is, I know I’m going to screw this up, but I think it’s like 6-1/2% of your income goes up on the first $118000 for social security, but once you hit that threshold, then you don’t get taxed for social security. Why?
Brendan: Who makes the laws? A lot of people who make more than $118000. And who gives them money? A lot of people that make more than $118000. It’s unpopular.
Tom Mullooly: Sure it is. But my feeling is that if they just make it unlimited, and whatever the number is, 7%. If it’s going to be 6.7% or 7%, whatever the number is, just make it unlimited.
Brendan: You could lower the percentage too if you make it unlimited. It’s not like we’re discussing nothing here. I agree with your point, but to tell somebody who makes 118 exactly that instead … You know what I mean? The dollars that people are not going to have in their paycheck. It’s basically going to negate anything that they just gained from tax cuts. Who’s going to do that? Is Donald Trump going to do that?
Tom Mullooly: Well, who is going to be giving these people money in the future when social security runs out, if it were to run out? You know what I mean?
Brendan: It doesn’t really run out though because people work and pay payroll taxes.
Tom Mullooly: That’s my thought is that if you earn the money, pay the tax. Pay the tax. If you make 150000 on the east coast in New York, New Jersey, Connecticut. If you make $150000, you are not well off.
Brendan: You’re middle class.
Tom Mullooly: Yeah.
Brendan: That’s fine.
Tom Mullooly: Maybe in other, what they called flyover states, you’re living large, but I don’t see anything wrong with the idea that I’m going to have this money sandbagged for 5, 10, 20 years, but then I’m getting it back, you know what I mean? I’m going to get it as a retirement benefit.
Brendan: Interesting though mentally to think of it that way is fine, but it’s actually more like somebody else is giving you money. Although old people that lament-
Tom Mullooly: That’s what’s happening.
Brendan: That is what has always happened, aside from having the trust fund to catch any spill-over. The majority of social security paid out every year is from people who are working now. So, the older generations that are collecting on it that lament the damned millennials. What if we all stopped working? There goes your social security, man. We’re all helping each other. That’s the point of this program. It’s not actually a return of … Nobody’s taking your money, investing it, and returning it to you. Somebody is paying for your income every month.
Tom Mullooly: Well one thing that pops into my mind is that I wish YouTube were invented back in the 1700’s because then we could actually show people what happened during the French Revolution, when they started to take these necessary parts of your life away from you. People burned down buildings. They flip out. When social security gets cut or eliminated, what will people’s behavior be like? Forget about predicting what’ll happen in the stock market or interest rates or anything like that. We’re just going to see people-
Brendan: We have no idea. If we can’t predict those other things, we have no idea what they … We have an idea. It probably won’t be pretty, but I don’t know for sure. I think all of these will be incredibly unpopular though. Whether we’re talking about raising the age, which I think is probably the most reasonable. Taxing more of people’s income every year, probably equally as unpopular, maybe more because it hurts you now and not in the future because people only think about the present version of themselves and not the one 20 years from now. And what would be the other one? Oh, to just do reduced payouts.
Tom Mullooly: Right.
Brendan: I see all three of those as options and they’re all equally not great in terms of how people will … Are any of those going to be perceived better than the others?
Tom Mullooly: Probably not.
Brendan: I guess it depends on who you are. If you don’t make a lot of money, then you’ll probably say the solution is to tax people who make more than 118000 more on their income and if you-
Tom Mullooly: I’m not saying tax more. I’m just saying keep the cap in place like we do for Medicare. So Medicare is unlimited now. You’re going to pay 1.4% on every dollar you make. Why don’t they just do that on social security? Problem over. Let’s go onto something else.
Brendan: I think maybe I misspoke then. That’s kind of what I meant. Tax more of their money, not raise the percentage or anything like that.
Tom Mullooly: No, not raise the percentage, but just say we’re going to make the cap unlimited. So, instead of being off the hook … Like I get a raise when I get to 118 or whatever the number is. Why? Why not just say it’s going to be-
Brendan: But that’s not how people perceive this. You’re being the rational, level-headed person who just wants to solve what seems like a crisis, when I don’t really think it is. It’s not as if we’re out of options, the trust fund’s empty in 2032, or whatever they’ve been saying, and that’s it. There are things that can be done. They’re just all unpopular and nobody is going to want to do them. What politician is going to lead the charge to do any of the three things we just put on the table?
Tom Mullooly: No one.
Brendan: Right, until they absolutely have to.
Tom Mullooly: Right.
Brendan: And whoever gets stuck with that, it’s like just kicking the can. Every president probably hopes that the economy just holds up during their presidency because they’re going to be blamed for it. Whoever is president when that happens is just going to get slaughtered along with Congress. So everybody doesn’t want to do it. They’re like, “Yeah. That sounds smart.” What you just said makes perfect sense to me, tax more than $118000. Tax all of the income at the rate that they do now, and then you have more money to pay out. Problem solved maybe, or at least it’s a better thing. But nobody is going to agree to that. How is that-
Tom Mullooly: I think part of the reason why that won’t work is because it’s not like the government can use that money. In fantasy land, the money comes out of my paycheck and goes into a lockbox. Remember that term? We’re going to put it in a lockbox so it can’t touch social security, and I’m going to get it back. Washington can’t get their hands on the money, because they’re technically not supposed to be using that. I don’t think that would really help build any highways or create jobs or do anything because that money really is supposed to be siphoned off into a-
Brendan: I’m not sure. Is there a need then to have the trust? It’s basically an emergency fund for social security so that when liabilities exceed what they’ve taken in, in terms of tax revenue to pay out, they have something there. If you look at demographic trends, you could probably project when and when you will not need some kind of extra fund. Do you need that, or can you run it as a break even system? Because like you’re saying, what good is it doing anybody if they have a giant emergency reserve? Does that make us feel great? Or then do we flip the narrative to complaining about all the money the government’s stockpiling and how we’re giving them free-
Tom Mullooly: Free flow to money.
Brendan: Float every year to just do whatever they want with our money. We don’t want that either, so what’s the solution here? We’re going to complain either way.
Tom Mullooly: Save more money.
Brendan: Things that you’ve touched on before though, and people say it all the time. Social security was never meant to be people’s only source of income in retirement.
Tom Mullooly: But it is now.
Brendan: It was supposed to be a safety net. It is. I understand that it is, but if we don’t want to do it through more taxation, then the solution is to transform what we mean by social security, and maybe it becomes more of a safety net again where you can’t get it until you’re almost 70, or something like that.
Tom Mullooly: I think part of-
Brendan: Why do we even let people take it early?
Tom Mullooly: That’s another topic that has always bothered me. That there are people who we know, one of the spouses died, left young kids at home. You know what, they need help. Someone who is disabled and can no longer work, they need help. Okay. What bothers me is that social security is a big umbrella, and you get all of these retired folks falling into that umbrella plus disabled plus survivor families. I think it would be better if you could segregate that and say, “We’re doing this for disabled people and we’re doing that for survivor families.” They have to rename this thing, this social security, for anyone who’s retired, because everything gets washed in together. There’s a lot of people who are disabled, really disabled. And there are people with kids under age 21. They need more help than they get.
Brendan: Yeah. You have to be very disabled to-
Tom Mullooly: Qualify.
Brendan: Qualify for the social security version of disability. That’s not something that’s being gamed, in my opinion.
Tom Mullooly: It’s not about that though. It’s about everything getting lumped in together. It’s kind of like the discussion about widows and divorced people. Well let’s get single people together. Widowed person … We’re getting a little off track here, but a widowed person has a different set of circumstances than someone who’s divorced. One of the things that we have talked about for years around here in the office was when social security was created in the 1930’s, the average life expectancy in the United States at that time was 66.
Brendan: Right. So, it was something to throw off a couple extra bucks at the tail end of your life, like the last five years or something.
Tom Mullooly: You’d get it at like 65. Now you can apply for early social security at 62.
Brendan: There has to be some kind of math behind that part of it, though. Why do we let people do it? I wonder if they’re offering it, you have to be … It’s true. Based on your life expectancy and stuff. They’re using actuarial stuff because they’re looking in the aggregate. The people who take it early and then live past the late ’70’s, early ’80’s are losing money and subsidizing people then who are getting more money by waiting or other people who have now entered the system. I think that if more people looked at it that way, they would try to … maybe they would redefine what it means to take it early. I don’t know.
I read something last week from Tony Isola, and it had stats in there that over 70% of people take it right away at 62. I understand there’s a large part of that group that need the money, but the people who say that they’re going to take it because they know for sure they’re not going to live long enough to break even, just blows my mind.
Tom Mullooly: False. Just false.
Brendan: Well, you’re basically … Maybe you haven’t looked at the base rates. If you look at the probabilities of, you can find them online, of if I’m this age, what’s the probability that I live to that age. You’re making a bad bet in most instances that you’re not going to reach the break-even age, but it’s again, it’s like you right now not caring about you at age 79, or whatever your break-even point is.
Tom Mullooly: Yeah.
Brendan: You’re basically saying, “Base rates are cool and that’s all true,” and accepting that the stats are what they are, and then saying, “but here’s why they don’t apply to me.” We all do this all the time with probabilities. If we know the odds of something, we should make our numbers-
Tom Mullooly: Respect the numbers.
Brendan: Based upon those probabilities. But it’s like, “Oh yeah. Well the probability of me living to this age is 75%, but my mom was sick.” This, that and the other. I’m not sure. Maybe they’re right, maybe they’re not, but it’s not scientific at all. It’s very feel based.
Tom Mullooly: Subjective.
Brendan: Yeah. I’m not sure that that’s how I would make a decision. It’s basically longevity insurance. If you live to be 95 years old, you’re leaving so much money on the table. And we don’t know if you will or not, but there are odds that we can make our bets based off of.
Tom Mullooly: If we were to apply the same kind of math that they built into the system in the 1930’s, basically you can start collecting social security at 65, but the average life expectancy is 66. If we were to do that today, the minimum age for collecting social security would be like 75.
Brendan: Right, yeah. I think that that, at this point, coming relatively from where we are, would be unpalatable. Literally nobody would ever suggest that we make that change. Even just saying that you can’t … like the 62 thing doesn’t exist anymore. Everyone just has to wait until their full retirement age, and no one gets reduced benefits. Or maybe you move the goal posts, and 66 is the new 62 in terms of you can get it, reduced benefit at 66, but the full benefit at 70 or something.
Tom Mullooly: Well they are moving it, because I know that based on … I was born in ’62 and I think they’ve moved my normal retirement age now to 67.
Brendan: Right, but they haven’t really done anything like that in a pretty long time.
Tom Mullooly: A long time, so they have to be-
Brendan: They’re going to have to draw another line in the sand. That may effect my generation.
Tom Mullooly: Sure.
Brendan: Because it’s going to have to be somebody between you and me.
Tom Mullooly: Right. Run for Congress, man.
Brendan: No thank you.
Tom Mullooly: It’s funny. You mentioned something a moment ago, talking about people saying, “I’m not going to live that long.” It reminded me of a story that I read in the Post a week or two ago about these two guys who used to do the commercial for the New York Lotto. I think their names were Lou and Curtis. Two guys, they never met before, but they both won $5 million dollars in the New York Lotto. They would up becoming friends and they did commercials for, you know, go out and buy a lottery ticket. So, when one of these guys won, he was 53 years old. He said that he chose the option where he would get the money each year for 20 years because he didn’t think he would live past his 70’s. He got checks for 20 years until he was 73. Today he is 90, and he is living in an apartment and had no money, totally broke.
Brendan: It’s just, I don’t know. It’s a gamble and it’s easy to make because it involves you 20 years from now. I don’t know how people … It’s tough to think in those terms. It’s like, I could get this much money right now. A lot of people need money right now. The decision on social security is a tough one, but I think that if you have the luxury of doing real financial planning around this topic, you are probably pretty well off. If you’re a married couple, you need to look at the odds that one of the two of you is going to live into your 80’s and maybe even 90. The odds aren’t terrific of one of you reaching your 90’s, but it’s like one in three. It’s not terrible either. It’s something close to that. I’m not sure exactly. But it’s a real risk. Like you said, if you just plan on that not happening, what are you going to do when it does? Sure, you could probably adjust your lifestyle and just spend less and stuff, but is that really a plan?
Tom Mullooly: Don’t burn bridges. That’s the plan. Have lots of friends who can bail you out. I read the Financial Planning Association, FPA, wants to add restrictions on the use of the term financial planner.
Brendan: Sounds good. To be actual fiduciaries?
Tom Mullooly: You actually have to be-
Brendan: Like you actually have to be a CFP?
Tom Mullooly: What prompted this was the idea that the-
Brendan: CFP board?
Tom Mullooly: The CFP board said that if you are going to use the CFP marks you have to be a fiduciary. That’s what prompted this statement from the Financial Planning Association. Good move.
Brendan: Yeah. I’m for it in both cases. I think if there were some way that we could streamline the terms that people in our industry are allowed to use when they reference themselves and what they do for business, I think it would be great, because we’ve discussed many times. I think all these terms just get thrown into this giant pot and people think that they mean the same thing, and they definitely don’t. Look, if you’re making these decisions, you can decide to do business with whoever you want. If that’s with somebody who isn’t a fiduciary, who works on commission and that’s what you’re comfortable with, that’s fine. I’m not trying to say everybody needs to work with fiduciaries like us. Obviously that would be self-serving, but I do think it’s confusing to consumers when there’s investment advisor, financial advisor, financial planner, wealth manager, account associate. What are these people? Do they all do the same thing? They’re all wearing shirts and ties and … Who are these people? I don’t know.
Tom Mullooly: It’s interesting to note that when we worked with Google to get us on Google Maps, and to set up our business page with the search engine, there was no … you know, you have to put down what your business actually is, like what you do. There was no drop-down option for investment advisor.
Brendan: And financial advisor.
Tom Mullooly: Financial advisor. Financial advisor and financial planner. I hesitate in using the term financial advisor when I talk about Mullooly Asset Management because there are so many other businesses that don’t do what we do that use that term. But unfortunately it’s kind of become … What’s the term that they use when they say, Xerox and get a Kleenex? You know, the brand name has taken over the description for what the term actually is. I think it’s tough for the public to really understand.
There was a report that TD Ameritrade put out about most investors don’t understand the difference between a financial advisor and an investment advisor. That report, still very useful today, still relevant today. That report came out in 2006. That was 12 years ago.
Brendan: I think it’s silly that basically the difference most of the time boils down to whether or not the person is a fiduciary. And to have the terminology be that similar, to the consumer, do I really care? Investment advisor, financial advisor. Investments are financial/ who cares? What is the difference? The names need to be more of a stark contrast so that you know what it is you’re getting. It sounds like we’re being petty and talking about semantics when it’s like, “No, no, no. We’re investment advisors.” We know what that means. We’re basically saying we’re fiduciaries, but to the lay person it’s like who cares. Investment advisor, financial advisor, what difference does it make.
And I think that if we have to correct people like that, it just makes us seem conceited and out of touch. I don’t care. Explain to me why I should care about that. Then come up with a better term for it because that’s ridiculous.
Tom Mullooly: Yeah. Hey, I want to talk about the changes. There was an article in the Wall Street Journal about the home equity loans.
Brendan: Under the new tax law, home equity loans and lines of credit are, on the first $750000 of mortgage debt-
Tom Mullooly: That’s total mortgage debt.
Brendan: Right. The bigger thing is that they’re only deductible to the extent which you actually do work on the home that you’re borrowing against in this instance.
Tom Mullooly: Now, this is where I want to zoom in on this because when I went to school and when I was learning the business, I was told that you could only deduct the interest on a home equity if you use the proceeds for improvement or work on the house. That was over 30 years ago. When did they let all of that slide?
Brendan: I don’t know.
Tom Mullooly: And now they’re trying to reinforce it. My point is, people can use this for whatever they want. My understanding is that not much has changed. If you want to take out a $50,000 home equity loan and go on a Caribbean cruise, go. You can’t deduct the interest. I don’t know how they’re going to enforce that. That’s my issue. How does the IRS enforce that? It would have to be discovered in an audit.
Brendan: Right. It basically comes down to what you and your accountant are comfortable with, and if you’re comfortable lying on your taxes about using money for a vacation that you say was for your home, then good luck to you. I don’t encourage that at all.
Tom Mullooly: But that has been the case for 30 years.
Brendan: I don’t know what the rule was before this. I’m not very well versed on that, so I’d like to look into that a little more because the article doesn’t make it seem that way. So, I don’t really know what the case was, but I definitely don’t encourage anyone to do anything that would be against the new rules, I guess, if this is new. They were talking to somebody, a regular person, towards the end of the article, who said, “We’re still going to take out our home equity loan, and we’re going to use it for whatever we want. That’s fine. We’re not doing it because of the tax deductibility. We’re doing it because we think that it’s the best choice for us right now.” I think that that is the much bigger point that should be stressed is that these things are an option for people that have a lot of equity in their homes and it may be something that you want to do, but don’t make decisions based upon just tax deductibility. Whether you’re buying a house or borrowing against it, or a whole host of other things.
Tom Mullooly: Or even selling investments. Don’t let the taxes cloud the decision.
Brendan: Sure. They’re a part of the discussion, but it should not be the primary concern in this case I don’t think.
Tom Mullooly: I think what infuriates me is for years you flip on the TV and you see these commercials for you can get a home equity loan and you can do anything. You can pay for junior’s college education. You can buy a car. You could take a vacation. You could do all of these things. I guess the tone for a lot of these TV ads is, hey you deserve a better life. You should be spending this money.
Brendan: Your house is a piggy bank.
Tom Mullooly: Yeah. I’ve always had a problem with that.
Brendan: I mean, the government is kind of, until now I guess if they’re tightening up the ship a little bit here, the government has been encouraging this too because when you make something tax deductible, that gives people-
Tom Mullooly: They become a partner in your venture.
Brendan: Right. What are we encouraging by letting people write off stuff like this? Obviously they’re not telling anybody what to do, but I think that-
Tom Mullooly: If they can enforce this, I think it would be great because I-
Brendan: They should just get rid of it all together. Why should you be able to write off debt like that?
Tom Mullooly: I think it will stop a lot of the credit expansion and the poor choices that people make.
Brendan: A lot of these are the kind of debt that you get through home equity, correct me if I’m wrong, is usually variable floating rate debt.
Tom Mullooly: It is.
Brendan: I don’t know. It’s tough to say when you take it out. Sure, you get a rate, but it’s going to adjust over time, if I’m correct in my train of thought here. You don’t even know exactly what the cost of borrowing against your home is going to be. You know what it is today and for the next year or whatever.
Tom Mullooly: Six months or a year.
Brendan: However often it resets. It’s tough to say, is this a good idea or not. It’s easy to assess in the very short term. Like I said, it’s on the table for people, but it’s got to be right for them.
Tom Mullooly: Well this is a-
Brendan: If they’re taking with a deduction, then that’s just one fewer silly reason to do it. It really has to be right for your situation.
Tom Mullooly: That’s the bottom line in the sense that it has to be right for your situation. We’ve counseled folks who have come into the office over the years and they’ve said, “My mortgage is my mortgage. I have this line of credit. I can pay off my credit cards. I can pay off a little student loan that I’ve got left. I’ve got a car payment. I can wrap this all into this home equity loan or line of credit on my home.”
Brendan: And it’s deductible. Whereas a number of the things that you said, like some of those were and were not deductible.
Tom Mullooly: Right. Credit card interest, car payments, things like that.
Brendan: You’re getting really, really creative, but I think you need to be careful when you’re replacing debt with more debt or bundling and rearranging the deck chairs, so to speak, because there’s probably another issue at play there, which relates more to your budget and cash flow. Honestly that’s the elephant in the room that people love to ignore. It’s like, “Oh yeah. I know what my budget is. I don’t need help with that.” It’s like, well if you’re working with us, we’re going to look at that anyway just because we want to make sure that everything is going smoothly here. You see people doing things like this a lot where maybe they are better off, maybe they’re not. But if you’re trying to be arbitrage interest rates and marginally lower the amount you’re paying in interest every month, it’s like sure, but maybe we do that and we also come up with a plan to make sure that the debt gets paid down faster than the minimums because realistically you’re not solving the problem.
Tom Mullooly: You’re not. You’re kicking the can down the road. A lot of times what I’ll show people is, okay, you want to take this car payment and make it go away, wrap it into a home equity. You’re going to be paying for this car over 20 or 30 years. This is going to be two or three cars ago, you know what I mean. This car is going to be worthless and gone, traded in, and you’re onto the next car with the next payment, and yet you have now taken this what could have been a three, four, five year loan, and now you’ve stretched it over 30 … You’re going to be paying for this car forever.
Brendan: Yeah, I think not in all cases, but in a lot of cases, the sale, if somebody is pitching you on it, or the attraction, if you’re discovering it for yourself, is that you can have more money now and not make any changes to your life. There’s no pain, at least right now in the present. And again, it’s a case of screwing over your future self because you’re basically, like you said, you’re going to pay for a depreciating asset like a car, instead of over five years, you’re going to pay for it over 25 years or something. 20 years. I don’t know. It sounds great today, and that’s how we make the decisions. That’s how our brains work. I don’t know. It’s not wise.
Tom Mullooly: I think we should rename our podcast More Money Now because I really like that phrase.
Brendan: What was thing that Thaler did, I think with, it might have been Danny Kahneman and Tversky. One of those three, the behavior economics guys. It’s like save more tomorrow. It’s where you agree now to increase your retirement contributions down the road, and you just sign up and then they do it for you. All these default choices, I think are the best way-
Tom Mullooly: I think it’s terrific.
Brendan: In a lot of cases to combat the biases that we have because if you sign up for it now, it’s like, oh well that’s not going to kick in for like five more years, and then I’ll start contributing more, because it’s easy to say you’re going to do something painful in the future. You’re going to figure out-
Tom Mullooly: I’m starting my diet tomorrow.
Brendan: Yeah. It’s like, I’ll figure out my cash flow five years from now, but in the meantime, I’m going to bundle all this debt and it’s going to make my budget work for two years. And I’ll figure it out. It’s fine.
Tom Mullooly: Well, thanks for listening to the Cleveland episode, episode number 216, of the Mullooly Asset Management podcast. We will catch up with you again in episode 217, which I think is southern Illinois.
Brendan: I’m trusting you here. I don’t know.
Tom Mullooly: Okay. 218 is in Indiana. This has been episode 216. Thanks for listening.
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