Will Social Security Be There?

April 28, 2016  |  by Matthew J. Ruttenberg

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Last November, the Social Security Administration announced the biggest change to the system since the 1980’s.  Back then, the change was your benefits will be taxed.  Now they closed a “loop hole” that was unintentionally created in earlier legislation.  Advanced strategies such as “File and Suspend” and “Restricted Spousal” will no longer be available after April 29th, 2016.  This could create quite a difference in someone’s retirement plan.

Moving forward, will this change give the Social Security Trust Fund enough savings to move the stick as they say?  No.  But before we discuss how to fix it, lets discuss the problem.

Currently, retiree’s checks are paying off the interest in the SS Trust Fund.  However, after 2020, we will start dipping into the principal.  This will exhaust the fund by 2033.  This assumes that there are no further changes to the Social Security system.

What this doesn’t mean is your checks will just stop sometime in 2033.  Our current tax code still creates enough income to cover about 75% of every promised benefit dollar.  With all that said, the good news is that there are still a few other changes that could occur in the future that could potential fix the problem.

Right now, there are 4 solutions being discussed to fix the problem:

  1. Increase the Earning’s Cap. Currently, the Earning’s Cap is at $118,500.  Which means that we are taxed UP to that point for our future Social Security Benefits.  If we simply raise, or remove the cap, the system would be fully solvent.
  1. Increase the FRA (Full Retirement Age) for younger workers. This probably isn’t the most popular option to the younger generations, but let’s be realistic.  My daughters are supposed to live to 110, so retiring at age 67 for most people won’t be an option.

But, right now, for anyone born after the year 1950, full retirement age is 67.  This basically means that if we were to retire early, there would be even larger penalties than there are today for someone retiring early.

  1. Payroll Taxes Could Increase. Right now, you pay 6.2%, and your employer pays 6.2% for a total of 12.4% for Social Security.  If we were to increase that by 2.83%, the Social Security Trust Fund would be completely solvent.  Most likely, that increase would be split between you and your employer.

The last three options wouldn’t affect current retirees, or soon to be retirees.  The last option, is the only one that would affect those who are currently collecting retirement benefits.

  1. Change to Chained CPI. Right now, the COLA (cost of living adjustment) is tied to the CPI-U index.  This is how the annual increases to our retirement checks are calculated.  There is a good chance that this will change to the Chained CPI.  And yes, although minor, this would most likely lower your COLA from year to year.

The easiest way to explain this is with a “supply and demand” scenario.  Chained CPI says that as things get more expensive your buying habits change.  If there’s a shortage of oranges and the price skyrockets, the most realistic scenario would be that you may switch to apples.

So in review, we are indeed running out of money in the Social Security Trust Fund.  But, you can see that there are a number of options that could be change to allow the fund to become fully solvent.  Hopefully, this will give you some level of relief that you won’t be losing your retirement benefits anytime soon.

If you have any questions involving what was discussed in the information above, please feel free to reach out to one of our advisors and we would be happy to explain this in more detail.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

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