It seems like everyone has an opinion on the health of our Social Security system, and often, the outlook is filled with doom and gloom. At Annex Wealth Management, it seems that the younger the person we meet, the more likely he or she holds a negative view on the health of Social Security.
We’ve found many younger people aren’t even willing to count on a Social Security benefit in their financial plan. But is there really a problem? Does it make sense to plan on a benefit during your retirement if you’re in your 30’s or 40’s? To answer those questions, let’s begin by covering some basics.
Social Security – along with Medicare – are huge components of our country’s critical social safety net. Although most of us agree individuals need more assets than just Social Security to fund retirement, it’s still a critical component of most personal retirement plans. Without it, it’s possible we’d see extreme poverty levels among retirees.
When you encounter discussion regarding the health of the Social Security trust fund, you may have heard that the reserve fund will be depleted by the year 2035. Some may assume once the reserve fund hits $0, there will be no benefits payable. This is untrue. At that point, 77% of all benefits will continue be funded – through current tax receipts alone. Although problematic, depletion of the reserves won’t completely prevent benefits from being paid.
As noted, current tax receipts make up most of the current funding, which makes improving the strength of the reserves much easier than the headlines would lead us to believe. Congress has many “levers” it can pull to improve the prospects of the trust reserves. We’ve already seen several changes made to increase reserves:
The Full Retirement Age
The full retirement age (FRA) is a term the Social Security Administration uses to determine when a claimant will receive their full retirement benefit. It wasn’t too long ago that the FRA was 65. Today, as medical advances lengthen our life spans, Congress deemed the FRA should increase as well. For most of us, we now must wait until age 67 to collect our FRA benefit.
When we’re employed, we all pay a payroll tax known as the FICA tax. Part of the FICA tax is the Social Security tax, which funds current benefits. Back in the good old days – back in 2000– the Social Security tax was limited to the first $76,200 of earnings (also known as the Social Security wage base). Congress has gradually increased the wage base nearly every year since then. Currently the Social Security wage base is $132,900 (2019), thus taxing more earnings and increasing revenue to the trust fund.
The Restricted Application
This is a fun strategy (for people like me, it is fun, believe me!) where one spouse collects his or her benefit and the other files a restricted application, and collects one half of the other benefit. The restricted application strategy allows their own benefit to continue to grow until age 70. Congress is currently phasing this strategy out, and if you are born after January 2, 1954, this option no longer exists.
File And Suspend
At a point in our not-too-distant past, a strategy existed where a spouse could file for, and then suspend, their benefit. File and suspend allowed their benefit to continue to grow at 8% annually until age 70. Because they were deemed to file for their benefit, the file and suspender’s spouse was able to file a restricted application and collect half of the suspended benefit. The result: both spouses had the ability to let their benefit grow to age 70 and collect half of one benefit now. *Sorry folks, Congress realized how lucrative this was, and shut it down in 2015.
We believe Congress will continue to make changes to both payroll taxes and claiming rules, centered on improving the health of the trust fund. Some options available to them are:
- Increase the FRA beyond age 67
- Increase the Social Security wage base above $132,900
- Increase the current Social Security tax rate from 6.2%
All these changes can be subtle and done over time. In fact, Congress is already in process of another change: Representative John Larson (D-CT) has sponsored “The Social Security 2100 Act” as HR 1902, which has strong support. Details of his proposed legislation can be found here: https://larson.house.gov/social-security-2100
In addition to other changes, HR 1902 will increase the Social Security tax from 6.2% to 7.4% over time and change the Social Security wage base, so earnings over $400,000 will also be subject to the tax. The Social Security chief actuary estimates this change will allow the trust fund to last beyond the end of this century.
Regardless if you agree with HR 1902 or not, the bill demonstrates that Congress will likely continue to act in some capacity to ensure our Social Security benefits will remain in the future. If you’re wondering why they’re so motivated, remember: Congress is aware our senior members can vote.
As a CERTIFIED FINANCIAL PLANNER™ professional, I include Social Security benefits in our client’s plans, and my own as well. I’m very confident this social program is here to stay, without reduced benefits, as it is way too important for our society.