Your Financial Future: Parties must work together to fix Social Security
This week, we are going to discuss another of the important retirement assets, Social Security.
Many seniors are worried and concerned. There have been some misleading campaign ads on this important topic. Today we will be concentrating on the retirement aspects of SS.
When SS was started, it was always a program where current workers paid for the benefits of already retired workers. Washington, D.C., did not provide a large starting expenditure to kick off the program. When the program first started, it only provided retirement benefits to a retired worker when they reached 65. Life expectancy at that time was just a few years longer. This made it easy to fund the program. Originally there were not extra benefits such as spousal payments.
When baby boomers were working, they were contributing a surplus to the trust fund. Both workers and their employers pay half of the 12.4% payroll tax. This was enough to cover payments made and contribute to the trust fund. However now, 10,000 boomers are turning 65 every day. As they start receiving benefits, the trust fund has started to supplement income from current wages.
Every year, the government is required to project many years of future solvency of the trust fund. Currently, the fund will run out in 2035. At that time, it is projected that benefits would have to drop to about 78% of normal benefit. This 78% would be coming from incoming payroll taxes. The pandemic has created additional stress on the system. As the unemployment rate has increased, there are fewer workers contributing to the fund. Also, some people may decide to retire sooner than they would have. This means they may be collecting benefits instead of paying in to the reserves.
This situation was going to happen in 1985. Two years before in 1983, President Ronald Reagan and Speaker of the House Tip O鈥橬eal reached an agreement that kept the system working until 2035. That will be for almost 50 years. At that time, the age for retirement was increased from 65 to 66 or 67. Taxes went up for both employee and employer and up to 50% of SS benefits became taxable to upper income workers.
Both parties have been playing political football. They could repair the system in a day if they would work together. Possible adjustments would include raising the tax rate, increase the age to start benefits, adjusting cost of living, maybe taxing the whole benefit for higher income families and maybe changing the level of income that is taxable. With longer life expectancy, most people get a very good return on their investment into SS. The changes would be spread out over a large percentage of the population and not be too harmful to any group. The sooner the changes are done, the more people will share in the process and the adjustments can be smaller.
Social Security and Medicare are mandatory expenditures of the government. The benefits must be made to the recipients. It takes a super majority of 60 votes in the Senate to make major changes. Lawmakers will fix these problems, because none of them can get re-elected if they do not. These two programs are responsible for almost 60% of the government蘑菇视频 budget each year. There is some very early talk of looking at the way Australia and New Zealand fund their retirement programs. This will need further study and bi-partisan support. We should fix the current system for now and do a more extensive study of possible structural changes down the road.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, 鈥淵our Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.鈥� If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.