Social Security Reform
The Social Security Trust Fund balance is still growing. That is the good news for those depending on Social Security for a portion or all of their retirement income. But benefit payments have exceeded payroll tax contributions for some time now and it is projected that the Social Security Trust Fund will run dry in 2034 unless something is done.
Congress has been trying to solve this insolvency issue for a long time and has made some progress but more still needs to be done.
What can we expect? Here are a few of the ideas being put forth:
- New PIA (Primary Insurance Amount) formula to put more emphasis on lower tier earning
- Raise FRA (Full Retirement Age) to 70 from the current 66
- No cost of living adjustments (COLA) for higher income taxpayers
- 100% taxation of benefits over certain income levels (currently 85%)
- Privatize all or a portion of contributions to personal accounts
- Reduced benefits paid to early retirees when their income is over certain thresholds
Each of these ideas have issues that must be debated.
Raising the retirement age seems like an easy fix to Social Security. People are living longer so they should be able to work longer. However, not all workers have participated gains in life expectancy the same. Research shows that low-wage workers capacity to work past the age of 60 is no better than it was for the past generations. Pushing the FRA out to 70 may force some low-wage earners to settle for a benefit reduction for early retirement.
The 100% taxation of benefits over certain income levels (currently 85%) has its own issues. Your social security contributions, whether withheld from your paycheck or paid as part of your 1040ES payments, do not reduce your taxable income the same as an IRA or 401K contribution. It should be argued that your PIA includes a portion of your contributions that has already been taxed. Taxing 100% of you Social Security benefits amounts to double taxation of your social security contributions.
Privatizing all or a portion of contributions to personal accounts has lost some of its momentum as a solution to fix social security once and for all but it remains a bargaining chip for those who want to do away with government backed retirement benefits.
Whatever changes are made to Social Security there are a few things to keep in mind:
- Benefits are not likely to change for anyone over 60 now and
- Uncertainty as to how changes may affect you increases as you go down the age scale
If you have questions about your Social Security benefits, please give me a call.
