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What is the Future of Social Security and Ways They Can Fix It

Kevin Wenke

Kevin Wenke

CFP | CLU | Investing | Insurance | Taxes

Are you wondering about the future of Social Security and whether or not it will be there for you when it is time to start receiving your Social Security Retirement Benefits?

The future of social security has been one hot topic for years. I remember when I was just starting out in my career there was talk about whether or not Social Security would be there for me when I retired. 

This topic is loaded with misinformation and redirection and my goal is to give you some clarity so you can make the best decision for your retirement.

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Just look at the headlines and chatter questioning the of Social Security which is both something that you and your employer separately paid into and a promise made to you by the government to you. 

The media often twists information to create an emotional narrative attracts eyeballs and ears to their content

This sensationalized “reporting” amplifies the questions that many people have, “will they take it away?” or “will they fix it?”

 Though there is no crystal ball to be certain of the future, there are ways to fix the system that are a helleva lot easier than to just outright take it away from people. 

I doubt elected officials want to have a revolt instead of conspiracy theories and speculation, but who knows anyone’s true motivation. 

Let’s look at history and see what they have done in the past to get an idea of what they could do in the future.

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According to the 2020 Trustees Report there are two ways to fix Social Security’s financial crunch: benefit cuts and tax increases.

What the report says and is summarized in the chart at left is that there needs to be a 25% tax increase in 2020 with that percentage increasing every year until eventually requiring a 33% tax increase by 2035 to fund the system.

On the other hand, a “benefit cut” would require a 19% reduction in 2020 continuing to increase every year eventually requiring a 25% cut in 2035.  Benefit cuts possibilities will be outlined later in this article.

What does a tax increase mean?  It could mean a couple of things.  First of all, it could be an increase that the future workforce has to pay to support those who are already receiving social security benefits.

In 2020, workers pay 6.2% FICA tax on their paychecks and their employers match 6.2% as well for a total of 12.4% of a worker’s income. 

The money an employer contributes is a tax deduction to their company’s income, however the worker’s contribution IS NOT TAX DEDUCTIBLE to the worker.

You have to realize that Social Security is a form of pyramid scheme because it requires new workers to pay for the benefits of retired and disabled workers.

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The first person to receive social security was Ida May Fuller.  During her life she received over $22,000 in benefits. 

You may wonder how much she contribute to the system while she was working.  That total was only $24.75!  Only $24.75 in contributions and $22,888.92 in retirement income.

The system has and always will depend on new workers supporting. retirees.

Tax Increase

As reflected in the Trustees Report Graph above, in order to continue the system new workers and their employers would need to increase their contributions by a certain percentage. 

In this example, the increase is a little more than 20% and it would allow Social Security to remain solvent for 75 years. 

Of course, that assumes a certain level of employment because unemployed and laid off workers are not making any contributions.

Secondly, another tax increase available could be increasing what is known as the “maximum income threshold.  “In 2020, the maximum threshold was $137,700.  

This means if someone had earned income any higher than this, the amount that is above this $137,700 (which is increased every year for inflation) is no longer susceptible to that 12.4% tax from the previous paragraph. 

Raising that threshold to say $250K could also help keep the system going.

The government could also opt to decrease benefits.  The first way to decrease benefits is to increase the tax on the benefits.

The increase of tax on the income effectively reduces the benefit for the recipient.

Decreased Benefits

Remember, the contributions you have made throughout your life haven’t been tax deductible. 

That 6.2% FICA tax they took out of your paycheck was done after they took out federal income taxes so in reality, they were taking out more than that 6.2%. 

In the not so distant past, when someone retired and started taking Social Security there was ZERO income tax taken out.  

If someone made a million dollars a year 100% of the social security income they received was 100% income tax free.

This changed in 1984 when the Reagan Administration started taxing as much as 50% of the total Social Security Income for high (or at least higher) income earners.  

In 1993 the Clinton administration created another bracket bringing as much as 85% of a recipients Social Security Income to be taxed.

They could change the tax again to possibly put 100% of the benefit on the block to be taxed. 

If they do, it probably will not be taxed higher than any other income.  More likely it would be taxed just like earned income, pension or IRA/401k withdrawals.

If you are paying attention, you should be asking the question “Could they raise taxes on all that income too?” and the short answer is an emphatic YES!

Another way the government could decrease benefits is by increased means testing which works together with an increase in several taxes.  See “Means Testing” chart.

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Here is what this chart is showing. The blue line represents an individual’s “Primary Insurance Amount” and is the benefit amount that a person is entitled to at full retirement age.

The other line is the percentage of income the Primary Insurance Amount replaces when a person retires

In my other articles, I discussed how Social Security benefits are determined by your top 35 years of earnings.  For example, If someone only averaged say “$10,000” per year of income during their life they would receive $9,000 of income from Social Security. 

This represents 90% of their average income while they worked. This person didn’t make a lot in their lifetime so Social Security will provide them with a high percentage of that income for their retirement. 

It’s too bad they didn’t make a lot of money while they worked but they get a GREAT RETURN on the 6.2% contribution they made on all of those years of income.

On the other hand, if someone averaged $100,000 of income over their working lifetime, their primary insurance amount from Social Security will be closer to $32,000 which equates to a replacement of only 32% of their pre retirement income.

Remember that the income threshold for 2020 was $137,700.  That is the maximum amount of income to which the 6.2% FICA tax is applied.  

By increasing that amount out, they would increase the revenue Social Security receives.

Each dollar that a worker makes increases their retirement benefit but not very much.  In the chart you can see the line start to change not increasing as rapidly, this is known as a “bend point.”  

For income above this amount, the tax that is imposed only increases benefits by 15%.

In the future, they could increase the threshold out and/or create a new bend point that only increases benefits on income above that limit by 5 or 10%. 

So even though these workers are being taxed the same on every dollar they make as the people making $10,000, the amount of benefit they receive is 10-20x lower for those additional contributions. If you want to learn more about taxes, than do read how taxes are determined on social security.

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Another change that could help fix Social Security is increase the retirement age.  Currently, anyone born after January 1, 1960 reached full retirement entitling them to full Social Security Retirement Benefits at age 67. 

If these individuals started taking their benefits early, which I explain in my video on how early benefits decrease Social Security, then they receive a smaller benefit for their entire life.

Taking benefits at a reduced rate is exactly what the system needs from retirees because it reduces the amount of benefits the system pays out.

If the government extended the retirement out to age 69, 70 or 72, they would reduce benefits even more on people who opted to take their benefits early.  

 This further reduces the total payouts that the system has to make.

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Here is a summary of different ways to fix the system and the percentage each strategy can eliminate from the shortfall.

Conclusion 

So there you have it a fairly detailed summary of some of the ways they can fix Social Security in the future. 

Will they take it away from current retirees?  I don’t know for sure, but I they will take it away.

here are other ways to fix the system for years to come relying on new workers and additional taxes on the next generation. This is how it has always worked. It is a pyramid scheme of sorts.

Therefore, it is important to consider ALL aspects of your financial life when making a decision on when to take this promised income from Social Security and make decisions that gives you the most benefit out of your entitlement.

By the way, do you know, majority of the people does not understand the complexity of social security availing timeline. Perhaps, people often regret their decisions after opting the benefits early or in some cases too late.

Which is why, I have written this book called Overcome the social security confusionYou can download the book for free. Just click on the book title and get your free copy now!

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