On a recent Sunday morning during my WSB radio show, "Money Matters," I received a question that I get asked regularly in some form or another. Let's call him 48-year-old "Jack" from Jasper, Georgia. He asked, "Wes, should I even consider Social Security in my income plan because it might not even be there by the time I retire, right?"
Many Americans are afraid that Social Security will be bankrupt by the time they retire. This prospect is a particularly scary one for the considerable number of Americans for whom Social Security checks are their only source of retirement income. What are they to do if Social Security goes away?
These fears are not unfounded. The Social Security Administration’s own predictions are pretty unnerving. In April, for example, the Social Security Board of Trustees said that its reserves would be depleted by 2035. That means, if nothing is done before that date, the Social Security Administration will only be able to pay between 75% and 80% of expected benefits for retirees. Now, while this may not sound like the end of the world, it is a severe reduction in a payment that is critical to most people’s retirement budgets.
Nancy Berryhill, acting commissioner of the Social Security Administration, has urged Congress to do something about the diminishing reserves before they run dry. Her stance is that we need gradual changes now, versus a panic-induced change when the situation becomes even more dire.
Enter the Social Security 2100 Act, a proposal to improve or shore up the system through the year 2100. The bill was introduced by U.S. Rep. John Larson, D-Conn. While there have also been other proposals submitted by both Republicans and Democrats to try to defuse this ticking bomb, this proposal is attracting a great deal of attention and currently has more than 200 co-sponsors.
Here’s what the Social Security 2100 Act includes:
1. A benefit raise: The proposal would give those who are or will be receiving benefits an automatic raise, equivalent to 2% of the average Social Security benefit.
2. New cost of living adjustment (COLA): The proposal would also change the formula used to calculate annual COLA adjustments. Right now, the COLA is based on increases in the consumer price index (CPI) for urban wage earners and clerical workers (CPI-W). Under the new plan, COLAs would instead use the consumer price index for the elderly (CPI-E) as a gauge for retirees' expenses. The CPI-E has actually risen at a higher pace over the past 30 years, but from 2001 to 2006, the CPI-E ran in line or below the general CPI.
3. Poverty line: The new minimum benefit would be set at 25% above the poverty line, as measured by the U.S. Census Bureau.
4. Lower taxes on Social Security benefits: Currently the thresholds for taxable income (before Social Security) is $25,000 for individuals and $32,000 for couples. Under this new plan, those income thresholds would be raised to $50,000 for individuals and $100,000 for couples.
5. Higher Social Security tax rates: Beginning in 2020, workers and employers would both face increased payroll contributions. The current rate of 6.25% would gradually increase to 7.4% from 2020 to 2043. This would likely result in a 50-cent increase in taxes weekly every year for the average worker.
6. Increased taxes for high-income earners: In my opinion, this is the worst part of the proposal. To pay for many of these proposed changes, the Social Security 2100 Act calls for imposing additional payroll taxes on wages over $400,000. Right now, Social Security taxes are capped once wages reach $132,900. Under this new proposal, individuals earning $500,000 would be taxed the full 7.4% (the new higher rate) up to the $132,900 mark, and then they'd pay another 7.4% on the income above $400,000. That's an extra $7,400 in tax! ($500,000 - $400,000 = $100,000 x 7.4%) On $1 million income, an extra 7.4% on income over $400,000 would translate into an extra $44,400 in taxes ($600,000 x 7.4% = $44,400) every year!
I love that Congress is finally getting serious about shoring up Social Security. Something has to be done to save this vital program from tapping out. But this bill includes a massive new tax on the wealthy, and that’s something I can’t support. Under this proposal, a high-income taxpayer could end up paying more into the Social Security system in one year than others will in a lifetime. And she would end up with the same benefit as lower-wage earners, despite chipping in 10, 20 or 30 times more.
This provision of the proposal will have to be addressed, as I'm sure it will be. But, overall, I think the Social Security 2100 Act is timely and much-needed. I'd love to hear your thoughts on this new proposal. You can always reach me and the "Money Matters" team at WesMoss.com.
Wes Moss has been the host of “Money Matters” on News 95.5 and AM 750 WSB in Atlanta for more than seven years now, and he does a live show from 9-11 a.m. Sundays. He is the chief investment strategist for Atlanta-based Capital Investment Advisors. For more information, go to wesmoss.com.
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