By Patricia L. Burris, CFP ® Vice President, Corporate & Retirement Plan Services
Provided by Meld University
The Status of Social Security
You may have heard about the status of Social Security in the news lately, much of which was presented as bad news. This was initiated because the Social Security Board of Trustees released their annual report to the public on Monday, April 22, 2019. In their report, the Trustees stated that the Social Security Trust fund is projected to fall below the level needed to pay full benefits in the year 2035. At that time, the Trustees project they will only be able to pay 80% of the benefits due Americans on Social Security and Social Security Disability.
Compared to the same report one year ago, the news is actually good. In last year’s report, the Social Security Trust fund was projected to run short of money in the year 2034 at which time they would only be able to pay 79% of promised benefits. So, this past year, the Trust fund projections gained one year (2035 vs. 2034) and beneficiaries gained an additional 1% (80% vs. 79%) of projected benefits payable to them.
However, more and more baby boomers are retiring, starting to claim the Social Security benefits, and no longer paying into the Social Security Trust Fund. So, it is unlikely the trend from last year to this one will continue. Therefore, if nothing is done to alter the status of Social Security, you and I, and everyone receiving benefits will get a reduced amount (currently 80%) of our monthly benefit. I am sure you are like me and certainly consider this bad news.
What Has Been Done About Social Security Solvency
I don’t recall a Presidential election in my adulthood that Social Security has not been debated, and the last few elections were certainly no exception. Congress passed several changes to Social Security in the 1970’s, 80’s, and 90’s. The Regan Administration made some of the most significant changes in April 1983 when the Full Retirement Age was gradually increased from age 65 to between ages 66 and 67. The last major change to Social Security was in April 2000 when Congress passed the “Senior Citizens Freedom to Work Act” which eliminated the “Earnings Test” requirement for folks who are working past Full Retirement Age and receiving Social Security. The bottom line is, although talked about a lot in the political arena, not much has been done to address Social Security solvency in the 21st Century.
Social Security 2100 Act – Will this Save Social Security?
Over this century, many bills have been introduced, most of which failed at the get-go since there hasn’t been enough support, much less bipartisan support, for it to pass. On January 30, 2019, Representative John Larson (D-CT), Chair of the Social Security Subcommittee of the House Ways and Means Committee introduced the Social Security 2100 Act. At its introduction, this Act had 201 Democratic cosponsors, with 203 at this time. A Bill like this only needs 218 of 435 in Congress for it to pass by a simple majority before it moves to the Senate. There are some provisions in the Act, however, that don’t have Republican support and may face some major opposition in the Senate. The provisions of the Act have both give and take for Americans, including the following:
- Base the annual COLA on the Consumer Price Index for the Elderly (CPI-E) instead of the currently used CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers). This is projected to provide an additional 0.2% COLA per year to recipients. For example, the SS COLA last year was 2.8%. If the CPI-W would have been used to determine the COLA instead of the CPI-E, the increase would have been 3.0%.
- Change the formula on how benefits are calculated, starting in 2020, to provide a higher amount on the first level (known as “bend point”) of the calculation (93% instead of 90%). This will increase everyone’s benefit by a relatively small amount (approximately < $35).
- Increase the special minimum Primary Insurance Amount to 125% of the annual poverty guideline which would raise the benefit for low career wage earners.
- Currently 85% of benefits are taxable to single taxpayers if their Provisional Income*1 is over $34,000 and married filing joint taxpayers with Provisional Income*1 over $44,000. The Act increases the taxable threshold for single taxpayers to $50,000 and married fling joint to $100,000
- Apply the payroll tax to earnings above $400,000. In 2019, only the first $132,900 is subject to the 6.2% OASDI (old age, survivors, and disability insurance tax) that each worker and their employer pays as Social Security tax. This amount is indexed annually, and the current indexing formula would stay the same. However, earnings over $400,000 would be also be subject to the 6.2% (or then current) tax.
- Increase the OASDI payroll tax rate by 0.05% per year for each employee and the employer portion until it reaches 7.4% per year in the year 2043, for a total annual tax of 14.8%.
Passage of the Social Security 2100 Act still has a long way to go. Rep. John Larson got an official hearing on this legislation on March 12, 2019 at which time he asked for, but did not receive, bipartisan support; in fact, he has yet to receive any Republicans to officially support the Act. This is because, the provisions that increase taxes (the last two bullet points above) are not supported by the Republican party. Rep. Larson is now in the process of revamping the Act in hopes of achieving enough support to pass in Congress, including Republican support, that will allow it to also pass when it is introduced in the Senate.
I am keeping a close eye on the status of this Act as well as proposals by both Democratic and Republican Presidential candidates. I am confident we will again see a lot of talk about saving Social Security and Medicare during this election cycle, but not sure how concrete each candidate’s plan will be. As I see proposals in Congress that have as many supporters as the Social Security 2100 Act, or when the Presidential candidates narrow to one Democrat and one Republican and they’ve outlined their plan to for Social Security or Medicare entitlements, I will be sure to keep you informed with updated blogs and articles on the Meld Financial website. If you are not already a subscriber receiving our blog posts via email and would like to be added to our distribution, please contact us on our website by clicking here or send me an email at email@example.com with any questions you may have about this article or Social Security and Medicare in general.
*1 Provisional Income = Adjusted Gross Income (not including SS) + tax exempt interest + 50% of SS
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