3 Things That Could Save Social Security

Category: Financial and taxes in retirement

November 28, 2017 — As if there wasn’t enough bad news to go around, your Social Security retirement check is in trouble. If Congress doesn’t act soon, retirement benefits will probably have to be cut by 23% in 2034 – when someone who is 66 years old now will be 83. Most everybody knows the two major reasons driving this – too many baby boomers getting benefits compared to the number of younger folks paying into the system, and our ever-increasing life spans. Combine that with the fact that 60% of Americans rely almost entirely on Social Security for their income, and we have a disaster in the works.

Recently we saw a very practical article in MarketWatch by Paul Brandus, “3 things that could help put Social Security back in the black“. His common sense approach so simply gets to the bottom of the issue that we thought we would repeat it:

1. Raise the retirement age. Brandus suggests that we start raising the normal retirement age for full benefits by a month a year. It wouldn’t take too long to raise it to age 68, which would do a lot to help stabilize the fund.

2. Raise payroll taxes. This one might hurt a bit. Currently employees pay 6.2% in FICA – the SS trustees recommend increasing that by another 2.83%. So if you make $50,000, your FICA share would go from $3100 to $4650 – ouch!

3. Raise — or eliminate — the cap on taxable wages. In 2018 if you make more than $128,700 you and your employer would stop paying into Social Security at the point when you earned that much (there is no limit on Medicare). SS misses a lot of potential revenue from CEOs who get those nice $50 million paychecks. The Center for Budget and Policy Priorities, a nonpartisan group, estimates are that from a quarter to as much as 90% of the SS shortfall could be solved with this idea alone.

Seems simple enough, right?
We have to do something, as every month of inaction makes the problem harder to fix. Yet neither party is talking about it. Neither is the guy who signed the rather dire Audit Report, Steve Mnuchin. It is a national embarrassment, in our opinion. Next time you talk with an elected official, ask them what their plan is to save your Social Security.

For further reading:
Full Social Security Trustees 2016 Report
Social Security: The Can That Keeps Getting Kicked Down the Road

Posted by Admin on November 27th, 2017

19 Comments »

  1. Well number three is the most popular among ways to salvage SS and I hear about it often. I believe 82.5% of all earnings are covered and taxed under SS, plus 5.7% of earning exceed the cap (2014 data Wall Street Journal).

    What caused some of the short fall along with longer life span and the many baby boomers was a slowdown in the average wage index. It is used to calculate increases in the S.S. earnings cap. With the index not moving up and increasing the cap amount of earning that would be taxed by S.S. it led to less money then expected flowing into SS. It is not working because wage growth slowed. In 5 years leading up to 1983, the increase as calculated by SS was 8.256%. In the 5 years leading up to 2014, the average was 1.576%. The wage index went down by 1.51% in 2009 the year the recession hit bottom.

    Since benefits are based on earnings, raising the earning cap would also mean that better-off recipients would also increase their benefit. Although not in proportion to their increased taxes. That is because SS benefits are structured to replace more of the earning of the lowest earning recipients and a smaller percent of income of top earners. The strong perception that people paid for the benefit they’re receiving, would not be as strong for high earners, and would feel more like a welfare program where one group pays and another group are recipients.

    by Bruce — November 28, 2017

  2. Congress could care less about saving and/or fixing Social Security. They have their cushy pension. Who cares about the rest of us? Take a look at the tax bill they’re fixin’ to foist on us and you’ll see who they care about.

    by Linda — November 28, 2017

  3. Since my kids are likely to live another 5-10 years longer than I will, I think #1 is entirely reasonable and prudent. With 10,000 people turning 65 daily, we obviously need to do something.

    by Peder — November 29, 2017

  4. Bruce – I see where you’re going, but context is everything. Your numbers about wage growth from 1978-83 fail to recall the miserable economic picture during that era. Inflation was out of control. http://www.multpl.com/inflation/table
    1978 – 6.8%
    1979 – 9.3%
    1980 – 13.9%
    1981 – 11.3%
    1982 – 8.39%
    With those numbers, wage increases of 8.256% pale in comparison. Which indeed, they did. Salaries were disastrously behind inflation. Mortgage interest rates were beyond outrageous when they got over 17%. http://www.mortgagenewsdaily.com/mortgage_rates/charts.asp?Y=1982&M=4

    Getting back to the current SS problem, I agree that raising the cap on taxable income would also raise the cap on benefits for higher earners, though there would still be a net revenue increase. (What would happen if disability income was stripped from the SS program and paid out of a different pot? I’ve seen an awful lot of people drawing long-term disability when they’re more than able to work. Not everyone on SSDI falls into this category, of course, but far too many do.)

    As for the solution for funding SS, I’d guess the solution will be some combination of all three of these ideas. Raising the FRA to 68 across the board will adversely affect people in physical labor jobs. Human bodies do wear out over time. If it were raised, perhaps public information campaigns could strongly educate people: those who opt for retirement earlier than X age will need to draw from their savings/retirement accounts for their first few years before SS will kick in.

    A thorny challenge, to be sure.

    by JCarol — November 29, 2017

  5. JCarol – The point is many people complain that we need to have an increase in the cap in which high earners no longer pay into SS or to get rid of it altogether. My statement is that the SS administration has a process to increase the cap and it is related to average wage index. I understand the inflation of those years, but I don’t believe that is taken into the wage index equation. The wage index formula was put in place in 1972, before that Congress would set the limit.

    Since the 1977 amendments were enacted, the contribution and benefit base has risen automatically with increases in average wages, largely addressing the historical goal of maintaining the relationship between preretirement earnings and benefit levels as wages rise. The goal was to reduce Social Security’s projected funding shortfall, while creating a less regressive payroll tax structure, particularly in response to changing earnings distributions.

    So I would think that instead of just taking the cap off like most people would want, the wage index may need to be tweaked once again to get more money flowing into SS. An example if you took the cap off: high wage earners are presently taxed at a 43% federal rate. Eliminating the cap on SS would raise the top rate into the 60% range, add state income tax, it could leave high earners paying 70% in taxes. Which was my point that SS begin to look like a welfare program and those high earners will find a way to take their money elsewhere.

    One answer will not be the solution to strengthening SS, raising the retirement age and maybe a stronger payout distribution equation for high income earners might help as you raise the cap over a period of time. I believe you will also need an increase in the FICA tax at some point.

    by Bruce — November 29, 2017

  6. The option to raise the retirement age should be a last resort. As mentioned above, it severely impacts those who have physical labor jobs and would adversely affect both the lower and middle class workers who find themselves simply physically unable to do their jobs for those extra few years. My husband is in construction and very few of his co-workers make it past 65. In fact, they barely make it to then and only because they have no choice financially. As for office workers who are more likely to be able to work longer, they face different, but similarly challenging risks. While it is great that people are living longer, are healthier and able to work until a later age, the older population are much more at risk of being impacted by layoffs. Workers in their 50s and 60s are much more vulnerable when companies start laying off and are far less likely to find a comparable job, if any at all. An abled bodied person at the age of 59, who expects to work another 10 years or more, can find themselves unemployed and unemployable, and are thus forced to take menial jobs just to make it to 62 or into an early retirement. Raising the retirement age could easily mean that those forced into retirement earlier than expected, could end up in financial straits. Raising it would be beneficial mostly to those who are not dependent on SS, leaving the rest struggling. One option not mentioned is raising the mandatory distribution age of 70 1/2. That could provide some relief in conjunction with increasing the cap on taxable wages.

    by Jacqueline — November 30, 2017

  7. I have an idea that I don’t think I have ever seen. I would propose a voluntary contribution program to be like a Part B to Social Security taxes. It would work somewhat like an IRA and all the monies plus interest would be paid to the heirs if death occurred before drawing it or during if the entire amount was not used up. This money could perhaps pay for the early years, age 62-67 then regular SS would kick in. This could be considered a bridge and would be used first to let regular SS grow. Or, it could be used to supplement SS. The way SS works now, the money you are taxed goes into one big pot and money is drawn out by those retiring. The actual money you contributed is never put into an account as YOUR money. This Part B proposal would go into an account with your name on it but could only be drawn out as SS monthly payments or lump sum to heirs upon death. You would have the option to draw it as a single stream of monthly income or combined with your SS check. It would be important for the government to give some kind of incentives to encourage people to save for the future. As it is now, people barely know what they will draw or the advantages of waiting. There needs to be more education on SS and Medicare at an earlier age.

    by Louise — December 1, 2017

  8. Louise – I think you pretty much describe the IRA/Roth/401K structures as they currently exist, heirs and all, but they are not managed by government (which is generally a good thing, since they can’t just use it for the Christmas party, paying off harassments lawsuits, new nukes, etc.). I’ve been saving for retirement since 23 (now 65 and retired 3 years), first in an IRA and later Roth and 401K, but you can only lead a horse to water. There is nothing to stop someone today from using their personal retirement investments to pay for living expenses before drawing SS, at least beyond the 59 1/2 age penalty threshold. I agree more education is needed, but I think that would be best started in middle school. Not retirement per say, but life long personal money management.

    by Peder — December 2, 2017

  9. Peder, I agree it would be modeled somewhat like an IRA/401K but my vision would be that it would be untouchable until age 62 as a stream of income if a person chose to retire at that age or later. The thing with so many people is that they can’t manage to put X amount of dollars away and open an IRA. Then not every company offers 401k’s. It would be so easy to be deducted as a payroll deduction. I agree also that retirement education should start at a much younger age not just a couple of years before retirement. My Hub was a tough nut to crack when it came to convincing him to save money out of his paycheck into 401K. He liked seeing a big paycheck rather than a smaller one with the contribution. Once the statements starting coming he changed his mind drastically. I have always been a saver and at times a bit of a penny pincher. We have never gone without and we have taken over 20 Caribbean vacations among many other vacations. We have bought many new cars and just about anything you can imagine and a paid off house and cars. Luckily we had the best of two worlds. We had great paying jobs and were able to save and splurge too. Not everyone is as lucky. Even if such a program was offered by the government, a lot of people wouldn’t participate and like you said, sometimes having government involved isn’t necessarily a good thing.

    by Louise — December 2, 2017

  10. Ric Edelman has put forth a plan that would make 70 the eligible age. You would be able to save more so you might be able to retire earlier than that anyway. You can find it if you search for edelmanfinancial

    by readingfam — December 2, 2017

  11. If Congress had to pay into Social Security AND had the same health Insurance and retirement plans/ options which We, the People have, they could solve problem QUICKLY. IF FOR EVERY DAY when there was not a balanced budget they lost pay, they’d hurriedly work TOGETHER TO SOLVE that problem, too. their disgusting behavior/back stabbing has got to stop. They are tearing our Nation apart much to the satisfaction of those who would see our country destroyed. United we stand, Divided we fall has more truth now than at any other time in our history.

    Editor’s comment: In our quest to avoid being the source of untrue information we have to point out that members of Congress have been paying into Social Security since 1984. Yes, they do have nice pensions, though. And we agree with you on Congress, can’t they try to unite us instead of tearing us apart. Thanks Kate. http://www.factcheck.org/2007/12/members-of-congress-pay-social-security-taxes/

    Since 2014 members have had to buy their health insurance through the same exchanges as ordinary citizens (although they don’t have to pay for it). https://fas.org/sgp/crs/misc/R43194.pdf

    by Kate — December 2, 2017

  12. The email link for the Trust for America was removed from my earlier post. If you search Trust for America, Ric Edelman you will find it. I am not associated with Ric Edelman in anyway. My husband and I don’t even use his financial planning company. I just thought it was an interesting take on saving Social Security. Basically you put $7000 into a secure savings vehicle and let it accrue interest so that when you retire you have the same amount of Social Security per year as you do now. His plan says “The comparison between the T.R.U.S.T. Fund for America and the current Social Security system is striking. Assume an American enters the workforce at age 22, earns $44,954 (the national average income, according to the Bureau of Labor Statistics), receives a 3 percent annual pay increase, retires at age 70, and pays 12.4 percent in Social Security taxes annually. Even if you assume that Social Security taxes never rise, this worker will pay a total of $605,038 in Social Security taxes by age 70.7 but instead of putting in hundreds of thousands of dollars you put in much less.”

    by readingfam — December 3, 2017

  13. I have a dental plan for my Hub and me. It is not insurance but they negotiate prices for procedures so you save money on most services. We have had it for two years and it’s pretty good. We have the family plan and on top of the price they charge you something like a $20 processing fee. My dentist office comments each time we have service that it is a pretty good plan. Here is the information.

    https://www.aetnadentaloffers.com/plans/aetna-dental-access?affid=111693

    There are probably other companies out there but this one will give you and idea on what it offers.

    by Louise — December 4, 2017

  14. Thanks for the tip, Louise!

    by JCarol — December 5, 2017

  15. Per readingfam’s recent post –

    “Assume an American enters the workforce at age 22, earns $44,954 (the national average income, according to the Bureau of Labor Statistics), receives a 3 percent annual pay increase…”

    Is this stating the national average income for a 22 year old is $44,954? Then future predicted income is this, plus a 3% raise every year thereafter? This stat sounds off to me even if it is attributed to Bureau of Labor Statistics. I don’t know of any AVERAGE 22 year old now making $44K a year (college grads included), and many of them are still trying to find jobs. I am 66 and have been working steadily until age 65 and can’t say I received a 3% raise on average throughout my entire life. I started out at $4,617 per year at age 18 and retired at $75,900 per year – all working as a secretary with no college education.

    I would do more checking into Trust for America, Ric Edelman before subscribing to his theory and advising any young folks I know.

    by BeckyN — December 5, 2017

  16. Moderator Flo was kind enough to find a good source of earnings by age group. The average 22 year old in America makes about $27,300, but by age 26-34 is making around $40,000. Not sure if it makes any difference in Edelman’s argument though. https://www.cnbc.com/amp/2017/08/24/how-much-americans-earn-at-every-age.html

    by Admin — December 6, 2017

  17. BeckyN, I am not a financial adviser and this program doesn’t even exist so I am not advising young people to participate. I just thought it was an interesting idea and posted it for the very reason that I was interested in others people’s thoughts. You had some good comments and I appreciate your input. I live in a high income (high expense) area so I’m probably skewed in my knowledge of annual salaries. The major reason we are looking to retire someplace else. I wonder with some tweeking if some kind of idea like this could possibly work because as it is we contribute way more to social security then we actually get back if you take compounding interest into account.

    by readingfam — December 6, 2017

  18. One of the reasons I keep coming to this site is how helpful and polite those who comment tend to be which is much appreciated in this day and age. My hope is that commentors would steer clear of politicizing as much as possible.

    Admin Comment: Bravo Susan! Thanks for reminding us. It is not helpful to use harsh language and get personal. Politics is a tough subject these days, please use restraint and respect. As long as the Comments remain objective we will keep them open on this topic, but if they stray we will close them off.

    by Susan — December 6, 2017

  19. readingfam – I am in agreement with you that other scenarios should be considered in lieu of current contributions to the SS funds, however I do still favor a mandatory aspect because msny will not put away for retirement is left to their own resources.

    by BeckyN — December 6, 2017

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