It seems everyone has been talking about the ultimate demise of the Social Security system for years now, and yet Washington hasn’t taken any significant steps toward fixing the problem. With the election year upon us, it’s more important than ever to be aware of the proposals on the table to fix the issue, as all of the suggestions will have an impact on your bottom line — either now or in the future.
While the Social Security system is not in imminent danger of “going broke,” the pressure is on in Washington for changes to be implemented to ensure the continuation of the system long-term.
According to the 2012 Trustees’ Report released in April, by 2033 all the securities will have been liquidated and trust fund reserves will be exhausted for Social Security. At that time, revenues will only be sufficient enough to pay just 75 percent of scheduled benefits.
The intention of Social Security is to provide a basic level of monthly income to workers and their families after workers have reached retirement age, become disabled or died. The program currently benefits more than 50 million people and is financed with payroll taxes from more than 150 million employees, employers and self-employed workers.
With the current 10.4 percent payroll tax rate (employers pay 6.2 percent, employees pay 4.2 percent and self-employed workers pay the full 10.4 percent), along with additional revenue from federal income taxation of benefits, the government has had a positive cash flow into the Social Security system for more than two decades. However, this favorable cash flow is changing as the large baby-boom generation, born between 1946 and 1965, moves into retirement.
For the past 35 years, there have been about 3.3 workers per beneficiary. And with each beneficiary currently receiving about $1,000 per month, the 3.3 workers each contribute approximately $300 on a monthly basis to provide the full $1,000 benefit.
However, after the population age shift in 2030, it’s estimated that there will only be two workers per beneficiary. Therefore, each worker will need to contribute $500 monthly to provide the same $1,000 benefit.
To solve the Social Security problem, the government is considering many proposed solutions, each with their own list of pros and cons associated:
» 1. Increase retirement age or provide smaller monthly payments during retirement.
» 2. Raise or eliminate the Social Security tax cap. (Currently, any wages earned above $110,100 go untaxed for Social Security.)
» 3. Base Social Security benefit adjustments on an index other than the consumer price index.
» 4. Raise the payroll tax rate for all workers and employers.
» 5. Start collecting payroll taxes on contributions to all benefit plans (not just 401(k)s), such as Flexible Spending Accounts.
» 6. Require all newly hired state and local government workers to pay into Social Security. (According to AARP, approximately 25 percent of state and local government employees do not pay into Social Security and therefore do not take Social Security benefits.)
» 7. Decrease the average benefit by increasing the number of years of earnings used to calculate Social Security benefits from 35 to 38 or even 40.
» 8. Reduce or eliminate benefits altogether for the highest-income households.
Ultimately, whatever is decided, workers will feel the impact financially either now, through increased taxes, or in the future with reduced or eliminated benefits. It’s essential that all workers take control of their financial futures by not depending on Social Security for future retirement needs.
— Justin Anderson, CFP, CRC, CLU, is vice president and chief investment officer at AmeriFlex, 3700 State St., Suite 310, in Santa Barbara. He has been a member of the AmeriFlex team for more than 10 years. He is a graduate of UCSB. He is a member of the Financial Planning Association and the Santa Barbara Estate Planning Council, and is an instructor of finance/business courses at SBCC. In addition, he teaches retirement courses for AARP and specializes in working with clients transitioning into retirement and/or needing income production. Contact AmeriFlex at 805.898.0893.