Greetings! I trust that this will find you well and enjoying life.
Even persons planning for retirement with the best understanding of how Social Security benefits fit with their retirement plans should remember they’re aiming at a moving target.
A jarring example is last year’s sweeping change to the “File and Suspend” and “Restricted Applications” strategies. Persons approaching retirement who planned on reaping those enhanced benefits must now recalculate.
So it’s important people don’t think of Social Security’s rules are set in stone when reviewing retirement income scenarios. For a look at what could be next, the Government Accountability Office (GAO) recently produced a 92-page overview of potential tweaks in a report for Congress called “Social Security’s Future.”
In its report, the GAO identified reasons Social Security may need to change, among them a declining birth rate and longer life spans. That means fewer workers and more recipients.
“Put simply, costs for the Social Security programs have begun to exceed tax revenues, and this trend is expected to continue,” the report found.
As an independent, investigative arm of Congress, the GAO didn’t make recommendations. But some of the potential changes listed could have a huge impact on future retirees if enacted:
• Change the benefits formula, scenario one
This is a biggie that may look innocuous at first. The proposal would change the way benefits are calculated. Currently, benefits are calculated based on income from the 35 highest- earnings years. One proposal would change that to include all working years. A person who started with a summer job at 14 then worked summer and part-time jobs through high school and college is going to add eight or more years of low earnings into the calculation, reducing the monthly retirement benefit. It favors recipients to knock off those low-earning years.
• Change the benefits formula, scenario two
This one is more complicated. The GAO looked at changing the replacement percentage of a worker’s average indexed monthly earnings (AIME). The formula currently is calculated to replace 90% of a recipient’s first $826 of calculated monthly earnings, then 32% from $826-$4,980, and 15% of anything over that. Add a fourth bracket to break up the middle earners’ average monthly earnings, with another step down, and the GAO reported: “Such a change would reduce benefits for all but the lowest earners.”
• Change the spousal benefit
Currently, spouses can claim benefits up to half their partner’s earnings. That percentage could be reduced.
• Raise the benefits age
You knew this was coming. The GAO said it’s possible to raise the Full Retirement Age (FRA) above 67, and raise the minimum age for reduced benefits to 63. Lifespans are going up; Social Security is paying people longer.
• Raise the taxable earnings cap
Right now; higher income taxpayers don’t pay the Social Security tax on anything over $118,500 in wages. There’s no reason that limit couldn’t be raised, the GAO said. This would hit high earners, and potentially employers, who must match the tax employees pay.
• Raise the tax itself
It’s 6.2% of wages now (up to the aforementioned $118,500). Why not a higher tax rate? Also bad news for the self-employed, who pay both their own and the employer portion for a total of 12.4%.
If there’s one comfort, it’s that the GAO understands changes to Social Security are a big deal. In a closing segment titled “Retirement is a Long Term Process,” the agency warns, “A reasonable amount of time will be required for the general public to understand how program changes might affect them and to make adjustments based on these changes …. An outreach and education effort will be needed to increase public confidence and set expectations appropriately.”
But if nothing else the report and the proposals in it, are a reminder that today’s Social Security may not be tomorrow’s Social Security. The only thing you can control is your own retirement plan.
If you have questions about your retirement planning don’t hesitate to contact us.
Jeff Christian CFP, CRPC