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The Armbruster Capital Management News & Education section of our website incorporates articles, vidcasts, and newsletters specifically geared towards issues that our clients are facing today.

ACM Journal - Investment Management
15 Oct

Chris’s Corner – Q3 2021 Newsletter

Social Security is a topic that is sure to arouse emotions. The “entitlement” nature of it bothers some folks. Some just don’t like the thought of not working and surrendering their retirement security to the government. Others don’t believe it will be around since the Social Security Trust Fund is basically broke. Also, deciding when to take Social Security involves some uncomfortable topics, such as life expectancy. However, Social Security is really a good thing that should be part of a deliberate retirement income strategy. Spoiler alert: it will be there for you when you need it.

Unfortunately, recent posturing over the federal debt ceiling has brought out Social Security doomsday talk again. We’re frequently asked about the program’s solvency, and if we should revise well-thought-out plans to accelerate lower payments to hedge against potential future program changes.

Indeed, this year’s Social Security Trustees report wasn’t full of positive news. If left alone, the report indicated that the combined trust funds would run out of money by 2034, meaning that current recipients could see benefit cuts,  and future recipients would receive lower than expected funds. The report noted that there would only be enough incoming revenue to pay out 78% of scheduled payments.

However, reneging on Social Security for current and future retirees would be political suicide for any politician. It would be almost impossible to keep your political career intact if you weren’t part of a solution, regardless of political affiliation and true understanding of how the system works. And, the good news is that there are a wide variety of relatively easy adjustments that can be made to the program that would extend the solvency and retain expected payouts. These include:

  • Raising or eliminating the wage cap.

The current wage cap is $142,800, meaning that workers only pay Social Security taxes on income up to that amount. According to a 2020 Congressional Research Service report prepared for Congress, “phasing in an increase in the taxable maximum to cover 90% of covered earnings over the next decade would eliminate 20% of the long-range shortfall in Social Security”. They also noted that if all earnings were subject to the payroll tax, but current benefit calculations were maintained (higher earners don’t get a higher benefit), the funds would remain solvent for over 40 years.

  • Redefining what income is subject to Social Security.

Fringe benefits, such as health insurance accounts and flexible spending accounts are not currently subject to Social Security taxes. According to the Center on Budget & Policy Priorities, including employer sponsored health insurance premiums could close over one-third of Social Security’s solvency gap. If other fringe benefits were also included, it could close an additional one tenth of the gap.

  • Increasing the Social Security payroll tax rates.

Currently, workers pay 12.4% of their wages towards Social Security. For those not self-employed, 6.2% comes from you and 6.2% comes from your employer. Self-employed are responsible for the full 12.4%. According to a September 2021 Congressional Research Service article, increasing the rate from 12.4% to 15.76% would keep the trust solvent for 75 years.

Cutting or eliminating any public welfare programs is a political challenge. Cutting the one that currently covers over 65 million Americans of prime voting age, that people feel passionately about having paid into, and that so many people rely on for a large part of their retirement income, would be nearly impossible. This is one benefit that is not going away.

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