Health Checkup for Social Security
by Carolyn Walder
Many of our clients have expressed their concern over the viability of our Social Security system. As we have learned, it isn’t quite as bad as the hype tells us, and Social Security will not be “bankrupt.” If you believe that Social Security will be unable to pay benefits when you retire (or they will run out of money if you are already in retirement), you are in good company. Just 45% of Americans surveyed by Gallup “believe that Social Security will be able to pay them a benefit when they retire.” Of course, this also implies that 55% of Americans don’t believe that Social Security will be there for them as a retirement income source. (The survey results were presented in an article that I had read, so I do not know the age demographic included in the survey, but the results certainly seem to jibe with our clients’ concerns about the viability of Social Security.)
It is true that in 2035 (just over 15 years from today!) the combined trust funds for Social Security’s disability and retirement programs will be depleted. Without changes, projected funding from payroll tax receipts will only be sufficient to pay 80% of promised benefits. However, it is also true that almost no one believes that Congress would allow that to happen. Considering that senior citizens are one of the most reliable voting blocs, I would bet that there would be a LOT of angry seniors if their benefit statement came in the mail and showed a 20% cut in their pay! We have lamented that the Congress has been kicking the can down the road for so long now. Recall the Simpson-Bowles plan (Montana Republican Senator Alan Simpson and Democrat Erskine Bowles, President Clinton’s Chief of Staff). Although their plan was a comprehensive debt reduction plan, part of it covered Social Security. The plan, which was overwhelmingly voted down in the House of Representatives in 2012, contained three significant changes to Social Security. It increased the taxable wage base on income to 90% of all income (instead of the current fixed wage base that only adjusts for inflation), which was projected to raise $238 billion over the decade from 2012 to 2022. It used a different measure of inflation to slow cost-of-living adjustments. Lastly, it raised the retirement age to 68 in 2050 and 69 in 2075. The Simpson-Bowles plan is now history.
However, there is apparently some movement on this issue. The current House of Representatives is working on the most substantive, serious Social Security reform in years. It is sponsored by Representative John Larson (D-CT) and, at last count, had 211 cosponsors. This bill is designed to create solvency for Social Security for the next 75 years; the period of time that Social Security is required by law to project their finances. However, it is not all about cuts; it also includes some benefits to existing retirees as well. It provides for an immediate increase equal to 2% of the average benefit of all enrollees (equal to about $30/month). It would shift to a more generous cost of living formula in the Consumer Price Index for Elderly Consumers (CPE-E) and increase the minimum benefits paid which would disproportionately help lower income retirees. Further, it would help higher-earning retires by raising the threshold at which Social Security benefits become taxable to $50,000 of income for singles and $100,000 for married couples filing jointly. (However, it penalizes married couples who file separately by taxing all their Social Security benefit.)
How are these benefits paid and the “trust funds” back to solvency? The answer is twofold: an increase in Social Security taxes and an increase in the wage base for high income earners over $400,000. The Act proposes to increase the rate at which employees (and employers) pay from the current 6.2% in gradual equal increases from 2020 to 2042 until the rate equals 7.4%. Furthermore, it proposes to include earnings over $400,000 annually into the Social security wage base. Right now all earnings over $132,900 are exempt from paying Social Security taxes. (This amount is projected to increase to $136,800 for 2020.)
This is the proposal on the table now. How would you fix Social Security? Increase the revenue (taxes)? Decrease the benefits? Some combination of the two? If you would like to take a stab at reforming the system you can play the Social Security Game created by the American Academy of Actuaries. If you come up with any great plans, please let us (and your Congressional representatives) know!
If you have any questions about this article or your Social Security benefits as it relates to your retirement planning, please let us know...we always love to hear from our clients!