Category Archives: Social Security

When to Start Social Security

My Comments: A very serious question, and one that requires some thinking about. We’ve talked about this before, but if you’ve not yet signed up, here are five questions you can ask yourself to get a better answer.

Chuck Saletta – May 19, 2017

Your lifetime Social Security retirement benefit is expected to be about the same no matter when you start collecting. Still, when you start collecting matters when viewed in the context of your end-to-end retirement plan.

You can start your Social Security retirement benefits any time between age 62 and 70, and the longer you wait within that window, the larger your monthly check will be. The trade-off between the age you start and the benefits you receive is such that, actuarially speaking, you’re likely to get around the same lifetime benefit amount no matter when you start in that window.

Even so, depending on your personal life circumstances, it may make more sense for you to start earlier in that window, later in that window, or somewhere in between. Here are five key things for you to consider when it comes to determining when to start your benefits.

No. 1: Are you still working?

If you’re still working and below your full retirement age (somewhere between age 66 and 67 for those who haven’t reached it yet), it generally makes little sense to collect your Social Security benefit. That’s because you’re penalized as much as $1 for every $2 you earn above $16,920 in the year.

Even if you’ve reached full retirement age, you may want to hold off collecting Social Security until age 70 if you’re still drawing a paycheck and that paycheck is enough to allow you to make ends meet. That’s because your Social Security check increases by 8% per year you wait past your full retirement age, up until age 70, to start collecting, and an 8% guaranteed increase like that is very hard to come by.

No. 2: How long will you live and stay active?

Aside from spending on healthcare, people’s spending tends to drop off the deeper into retirement they get. While you may technically get more money overall by waiting until age 70 if you survive long enough, how much of that extra money will come after you’re no longer able to make much use of it? As my Foolish colleague Todd Campbell recently pointed out, the crossover age happens somewhere between 79 and 81 years old, depending on when you start claiming.

Even if you do live long enough to receive more money from Social Security by waiting to collect, ask yourself how active you really see yourself being in your 80s and beyond. There’s value in getting the money sooner, while you’re more active and better able to enjoy it. If you reach the later part of your golden years regretting the things you didn’t get done because you didn’t have access to more money younger, there’s no do-over option at that point in your life.

No. 3: What other sources of financial support do you have?

If taking your Social Security check early makes the difference between surviving and starving, by all means, take it. If, on the other hand, you’ll be receiving temporary retirement income such as from a structured sale of your business or an employment severance agreement, it may make sense to wait. If you don’t need the money right away, waiting for the bigger check might make a whole lot of sense.

Remember, too, that your Social Security benefit itself can become taxable if your income is high enough. According to Social Security, as much as 85% of your Social Security benefit can be considered part of your taxable income. All it takes is $34,000 in combined income if you’re single or $44,000 in combined income if you’re married filing jointly, and 85% of your Social Security benefit becomes taxable income to you. Almost everyone filing as married filing separately will see their benefits taxed.

Social Security defines your “combined income” as your adjusted gross income plus your non-taxable interest income plus half your Social Security benefit. Because it includes your non-taxable income and half your Social Security benefit, it can be easy to reach that level even if your otherwise taxable income is low.

If your other sources of income are longer term in nature, such as a pension, rental income, or investment income, then it makes less sense to wait. After all, you won’t be avoiding the tax on your Social Security benefit by postponing taking that benefit, and the sooner you start Social Security, the less you have to depend on your other income for support in those early years. That could enable you to keep more invested more aggressively for longer, potentially improving your overall retirement income.

No. 4: How big are your Traditional 401(k) and Traditional IRA balances?

Once you turn 70 1/2, you’re generally required to start taking distributions from your Traditional IRA and Traditional 401(k) plans. While the distributions start off fairly small — around 3.6% of your balance — they grow as a percentage of your account balance every year after that until age 115. While you can’t avoid those required distributions, you can get your money out earlier and potentially at a lower tax rate.

Once you turn age 59 1/2, you can start withdrawing money from your traditional 401(k) and Traditional IRA plans without facing a tax penalty . If you have a substantial Traditional IRA and/or Traditional 401(k) balance, you can start taking that money out to cover your living expenses before you start your Social Security. By holding off on Social Security while you take those withdrawals from your Traditional 401(k) and/or Traditional IRA, you can keep your income and tax down while drawing down those balances.

If you get your Traditional 401(k) and Traditional IRA balances low enough, then you won’t face as steep required minimum distributions later in your retirement years. In addition, any money you took out of those plans and didn’t spend remains yours to use as you see fit. By leveraging those factors over time, the combination can give you the opportunity to keep your overall taxes lower in retirement without really affecting your overall retirement lifestyle.

No. 5: Do you plan to convert your Traditional IRA and/or Traditional 401(k) to a Roth IRA?

Similar to the previous point, you can convert your Traditional IRA and 401(k) balances into your Roth IRA, paying taxes on the conversions along the way. Roth IRAs are not subject to required minimum distributions for the original account holder, and thus once the money is in your Roth IRA, you can keep it in that account as long as you are alive.

There are three key differences between this point and the previous one, though. First, you can convert your Traditional plans to your Roth IRA starting at any age, not just at age 59.5. Second, remember that money you convert to your Roth IRA isn’t available for you to pay the conversion taxes on, unless you subsequently withdraw that money from your Roth IRA. Third, money you are required to withdraw from your traditional plans after age 70.5 must be withdrawn, and can’t be part of a Roth conversion.

That combination of factors means that when it comes to Roth conversions, it’s useful to have another source of money to cover the taxes associated with the conversions as well as your costs of living. As a result, it may make sense to start taking your Social Security to have a source of money to cover those costs while converting your Traditional IRA and Traditional 401(k) plans into your Roth IRA.

Make the right Social Security choice for you

Social Security serves as a cornerstone for the retirement plans of millions of Americans. As with any cornerstone, it works best when it’s part of an end-to-end structure designed around a useful purpose, in this case, your retirement. By understanding how these five key factors interact with your choice on when to start taking Social Security, you can design an end-to-end retirement plan that better suits your needs with the resources you have available. And that’s a recipe for retirement success.

Social Security Changes Coming

My Comments: We all know Social Security is here to stay, right? Well, maybe not.

What was started in 1935 has undergone a few revisions, the last significant one in 1983. That was because it was going broke fast, and the baby boomers and their impending retirement were on the horizon.

Well, it’s time for another major revision, but right now there is no political will to make it happen. However, like it or not, some changes are on the near horizon and you need to know about them.

Sean Williams | May 22, 2017

Social Security is, for many retired Americans, a financial foundation that they’d struggle to live without.

A study conducted by the Center on Budget and Policy Priorities (CBPP) found that the elderly poverty rate inclusive of Social Security benefit payments is 8.8%. Without these payments, the CBPP estimates that senior poverty rates would shoot above 40%! Based on the more than 41 million retired workers receiving a monthly benefit as of March, we’d be talking about an increase in the elderly poverty rate of more than 12 million people. That’s no insignificant figure, and it demonstrates the importance of this program.

There’s a big Social Security change that’s just three years away

But as many of you may have heard by now, Social Security is on a collision course with disaster. According to the Social Security Board of Trustees 2016 report, the Trust’s more than $2.8 billion in excess cash will be completely exhausted by 2034. Once this money is gone, the Trustees have estimated that across-the-board benefit cuts of as much as 21% may be needed to sustain payouts through the year 2090.

What you may not realize is that a big change that’ll precipitate this cash downfall is right around the corner. Beginning in 2020, per the Trustees’ estimates, Social Security will begin paying out more in benefits than it’s generating in revenue. In other words, the switch will officially be flipped, and the more than $2.8 trillion spare cash pile will begin to dwindle.

Why, you ask? There’s no one specific reason. Rather, it’s a confluence of factors that include:
• The ongoing retirement of baby boomers, which will lower the worker-to-beneficiary ratio
• Lengthening life expectancies, which allows people to claim benefits for an extended period of time
• The rich, who are living noticeably longer than lower-income folks and are able to draw a (large) benefit payment for a longer period of time
• America’s poor saving habits, which coerce workers and seniors to be extra reliant on Social Security during retirement
Say goodbye to over $90 billion in annual program revenue

Yet, there’s another issue not mentioned above.

Social Security has three means by which it generates revenue:
• Payroll taxes
• Interest income on its spare cash
• The federal taxation of benefits

Payroll tax helps funds Social Security at a rate of 12.4% of earned income between $0.01 and $127,200, although most workers only pay 6.2%, with their employer covering the other half. This maximum taxable income figure of $127,200 changes in step with the average wage index most years. In 2015, payroll taxes accounted for 86.4% of the $920.2 billion in revenue collected for Social Security.

The federal taxation of benefits amounted to about 3.4% of total revenue in 2015. Social Security recipients with incomes above $25,000 or joint filers with income above $32,000 are subject to having at least half of their benefits exposed to federal taxation.

The final 10.1% (the numbers don’t add to 100% due to rounding) is comprised of interest income from its more than $2.8 trillion in spare cash. This cash is invested in special issue bonds designed for trusts and, to a far lesser extent, certificates of indebtedness. In 2015, nearly $93 billion in revenue was generated by this spare cash.

But beginning in 2020, this spare cash will start to dwindle — and as it dwindles, so will the interest income generated for the program. Higher interest rates could help ebb the pain a bit since it will mean higher yields on the aforementioned special issue bonds, but it’s not going to do enough to prevent the program from running out of excess cash by 2034.

The two most popular Social Security solutions are at opposite ends of the spectrum

Now, this is where things get interesting. It’s not as if Congress doesn’t have effective ways to fix Social Security’s more than $11 trillion, 75-year budgetary shortfall. It does. The issue is simply that Democrats and Republicans both have an effective fix, and neither wants to cave in to the other party’s solution.

The Democrats’ thesis is that the wealthy should shoulder more of the load. As noted above, the maximum earnings cap as of 2017 prevents the payroll tax from being applied to earned income above $127,200. Democrats have suggested lifting this earnings tax cap to a figure between $250,000 and $400,000 (essentially giving earned income between $127,200 and $250,000-$400,000 a free pass, then reinstituting the payroll tax), or even removing the cap altogether and taxing all earned income.

Removing the payroll tax earnings cap altogether would only impact about 10% of the population, which is what makes it such a popular choice among the public. It would also completely eliminate the program’s cash shortfall.

At the opposite end of the spectrum, Republicans have been pushing the idea of raising the full retirement age, or FRA. Your FRA, which is determined by your birth year, is the age at which you become eligible to receive 100% of your retirement benefit. The FRA began increasing by two months per year in 2017 from 66 years, and it’ll continue to do so until it hits 67 years by 2022.

Republicans have proposed further increasing the FRA to 68, 69, or 70 years to account for increased longevity. Raising the FRA forces seniors to wait longer to get 100% of their due benefit or to claim early and accept a steeper cut in benefits. This solution fixes Social Security’s shortfall, too.

In order for Social Security to be fixed for the long term, we’re probably going to need to see compromise with both sides meeting in the middle. But one thing is for certain: The longer Congress waits, the direr the situation could be for seniors.

Source article: https://www.fool.com/retirement/2017/05/22/a-big-social-security-change-is-coming-in-2020-and.aspx

Social Security Rules

My Comments: For millions of us, Social Security is critical for keeping our heads above water. If you are just now entering the transition to retirement, what you read here is basic information you need to be aware of.

Wendy Connick / May 12, 2017

Calculating your Social Security benefits can get…complicated. It’s not just a matter of looking at the number on your Social Security statement and figuring that’s how much you’ll get. A number of different rules will have an impact on determining your final, actual benefit check, so it’s important to understand these rules and how they may affect your benefits.

Rule No. 1: Your base benefits are determined by your 35 highest-income years

When calculating your benefits, the Social Security Administration only looks at your 35 highest-income years. If you worked more than 35 years, the rest of your work history (and the money you paid into Social Security) simply doesn’t count toward your benefits calculation.

Rule No. 2: Social Security retirement benefits come in three flavors

Setting aside disability benefits, there are three kinds of Social Security benefits paid out during retirement: basic retirement benefits, spousal benefits, and survivor benefits. Retirement benefits are based on your earnings; spousal benefits are based on your spouse’s or ex-spouse’s earnings; and survivor benefits are based on your deceased spouse’s earnings. Spousal benefits can be up to one-half of your spouse’s full retirement benefits, while survivor benefits can be up to your deceased spouse’s full retirement benefits.

Rule No. 3: You can’t get both spousal and retirement benefits

If you are eligible for spousal benefits and standard retirement benefits based on your own earnings, you can’t get both types of benefits — you can only claim one. If your spouse earned significantly more than you did, this could result in your never actually getting your own retirement benefits.

Rule No. 4: Taking benefits early will cost you forever

If you start taking your Social Security benefits before “full retirement age” (which is typically either age 66 or 67, depending on your birth date), then your monthly benefit amount will be permanently reduced. Start taking benefits at age 62, the earliest possible start date, and your benefits will be reduced by as much as 30% for the rest of your life.

Rule No. 5: Claiming your benefits late results in larger monthly checks

If you wait until after full retirement age to claim your Social Security benefits, your monthly benefit check will increase by 8% for every year you wait. However, these credits stop accruing once you hit age 70 — meaning that it doesn’t make sense to wait longer than that to claim your benefits.

Rule No. 6: Working while receiving Social Security benefits may reduce your benefit checks

If you earn more than $16,920 per year (in 2017) while also receiving Social Security benefits and are under full retirement age, your benefits will be reduced by one dollar for every two dollars that you earn above this base amount. Once you’re above full retirement age, your earnings will no longer limit your benefits. What’s more, the Social Security Administration will credit you for the benefits you didn’t receive in previous years due to earning extra money, and will add that amount to your future benefits.

Rule No. 7: Social Security benefits are capped

For 2017, if you claim your Social Security benefits at full retirement age, the most you can get is $2,687 per month. You’ll get the maximum if your Average Indexed Monthly Earnings during your 35 highest income years was at least $8,843 (indexed means that your earnings are weighted to account for inflation). If you wait until age 70 to claim your Social Security benefits, then the most you can get in 2017 is $3,538 a month. The average Social Security benefit for 2017 is $1,360 per month.

Rule No. 8: Your Social Security benefits may be taxed

If one half of your Social Security benefit plus your other taxable income for the year plus nontaxable interest is equal to or greater than $32,000 (for married filing jointly) or $25,000 (for unmarried taxpayers) then your Social Security benefits will be partially taxable. Just how much of your Social Security benefits will be taxed depends on how much taxable income you have for the year. Nontaxable income, such as distributions from a Roth account, doesn’t count toward this threshold.

Putting it all together

It’s best to get familiar with the Social Security rules well before you’re ready to retire. If you wait until you want to start claiming benefits, you may miss some important opportunities to bump up your benefits. Still, it’s better to learn these rules late than to never learn them at all.

Medicare Knowledge

My Comments: The Kiplinger article from which this comes is titled “Ten Things You Must Know About Medicare.”

With confusion being spread in D.C. these days, and with so many of us counting on Medicare to help us with medical issues as we live out our lives, I found this to be great information and so I share it with you.

May 16, 2017 by the Editors of Kiplinger Magazine

Heading into your retirement years brings a slew of new topics to grapple with, and one of the most maddening may be Medicare. Figuring out when to enroll, what to enroll in and what coverage will be best for you can be daunting. To help you wade easily into the waters, here are ten essential things you need to know about Medicare.

Medicare Comes With a Cost
Medicare is divided into parts. Part A, which pays for hospital services, is free if either you or your spouse paid Medicare payroll taxes for at least ten years. (People who aren’t eligible for free Part A can pay a monthly premium of several hundred dollars.) Part B covers doctor visits and outpatient services, and it comes with a monthly price tag — for most people in 2017, that monthly cost is about $109. New enrollees pay $134 per month. Part D, which covers prescription drug costs, also has a monthly charge that varies depending on which plan you choose; the average Part D premium is $34 a month. In addition to premium costs, you’ll also be subject to co-payments, deductibles and other out-of-pocket costs.

You Can Fill the Gap

Beneficiaries of traditional Medicare will likely want to sign up for a medigap supplemental insurance plan offered by private insurance companies to help cover deductibles, co-payments and other gaps. You can switch medigap plans at any time, but you could be charged more or denied coverage based on your health if you choose or change plans more than six months after you first signed up for Part B. Medigap policies are identified by letters A through N. Each policy that goes by the same letter must offer the same basic benefits, and usually the only difference between same-letter policies is the cost. Plan F is the most popular policy because of its comprehensive coverage. A 65-year-old man could pay from $1,067 to $6,772 in 2017 for Plan F depending on the insurer, according to Weiss Ratings.

There Is an All-in-One Option

You can choose to sign up for traditional Medicare — Parts A, B and D, and a supplemental medigap policy. Or you can go an alternative route by signing up for Medicare Advantage, which provides medical and prescription drug coverage through private insurance companies. Also called Part C, Medicare Advantage has a monthly cost, in addition to the Part B premium, that varies depending on which plan you choose. With Medicare Advantage, you don’t need to sign up for Part D or buy a medigap policy. Like traditional Medicare, you’ll also be subject to co-payments, deductibles and other out-of-pocket costs, although the total costs tend to be lower than for traditional Medicare. In many cases, Advantage policies charge lower premiums but have higher cost-sharing. Your choice of providers may be more limited with Medicare Advantage than with traditional Medicare.

High Incomers Pay More

If you choose traditional Medicare and your income is above a certain threshold, you’ll pay more for Parts B and D. Premiums for both parts can come with a surcharge when your adjusted gross income (plus tax-exempt interest) is more than $85,000 if you are single or $170,000 if married filing jointly. In 2017, high earners pay $187.50 to $428.60 per month for Part B, depending on their income level, and they also pay extra for Part D coverage, from $13.30 to $76.20 on top of their regular premiums.

Social Security Myths

My Comments: Social Security benefits are almost universally critical to retired Americans. The transition from working for money to having money work for you is complicated and perilous. Know as much as you can before you commit.

Tom Anderson – April 25, 2017

You probably know less about Social Security than you think.

More than two-thirds of older workers said they were confident about the rules of America’s largest retirement program, according to a new survey by Fidelity Investments.

Yet among the 521 people age 55 to 61 that Fidelity polled in October, most got these three key concepts wrong:

Give advance notice

To that point, 65 percent of people close to retirement didn’t know that you have to apply to the Social Security Administration three months before you receive your first benefits check. And 9 percent believed that the agency would contact them when it was time to receive benefits.

You are mostly on your own when it comes to Social Security notices. The SSA only sends out paper statements to people age 60 and over who aren’t receiving benefits and who don’t have a My Social Security online account.

My Social Security is the best place to learn the basics of the program, said David Freitag, a financial planning consultant at the MassMutual Financial Group. Freitag recommends people review their annual Social Security statements at least once a year.

Check to make sure the earnings record on your Social Security statement is accurate, especially for years where you’ve switched jobs. You can correct errors within three years, three months and 15 days following the year of the mistake. If you miss the deadline, it’s still worth it to try to fix the statements because the SSA has been known to cut people some slack.

Know your full retirement age

Fidelity found only 26 percent of older workers actually knew their full retirement age, or the age at which you can claim your benefits unreduced.

Your full retirement age is based on the year you were born. For those born before 1955, the age they can claim unreduced benefits is 66. For people born in 1955 and later, the age slowly creeps up to 67.

The earliest you can claim Social Security is age 62. Most people still file for benefits before their full retirement age, yet more workers near retirement said they want to delay their claiming decision, according to Fidelity.

Only 28 percent of those age 61 that Fidelity surveyed said they are planning to claim benefits as early as possible. That is a significant decline from 2008 when 45 percent of people surveyed near age 62 said they wanted to begin collecting immediately.

“You should pay attention to Social Security. For most people, it is the biggest source of guaranteed retirement income that they will have.” -David Freitag, financial planning consultant, MassMutual Financial Group.

“Social Security knowledge is increasing over time,” said Ken Hevert, Fidelity’s senior vice president of retirement. “People are starting to think about their Social Security claiming strategy years before they retire.”

Understand your spousal benefits

Your ex may be entitled to benefits based on your earnings, but it doesn’t affect your payouts. Half of older workers surveyed by Fidelity thought their benefits could be reduced if an ex made a claim. That’s not true.

Here are the basics of spousal benefits: Those who were married for 10 consecutive years and haven’t remarried can claim either their own benefits based on their earnings or half of the former spouse’s benefits, whichever is higher, once they reach full retirement age.

Claiming options can be complicated. Fidelity launched a free Social Security benefits calculator to help people figure out which strategy works best for them. It joins the scores of free Social Security tools available online.

These calculators are a good starting point, Freitag said. He recommends that married couples, especially those with complicated money situations, share the results of these tools with their financial advisors to craft a claiming strategy.

“You should pay attention to Social Security. For most people, it is the biggest source of guaranteed retirement income they will have,” Freitag said.

Make Social Security Great Again

My Comments: Short and sweet.

Sean Williams / Jan 29, 2017

For more than 75 years the Social Security program has protected the financial well-being of our nation’s retired workforce. Today, more than 41 million retired workers are receiving monthly benefit checks from Social Security, a majority of whom need that income to meet their expenses during retirement.

Plenty of solutions, but no sure fix

Yet in spite of the relief that Social Security brings to millions of Americans, the program is facing a long-term crisis. Two major demographic shifts — the ongoing retirement of baby boomers, and the lengthening of life expectancies — are expected to flip the switch on Social Security and take the program from a cash inflow to a cash outflow by the year 2020. According to the 2016 report from the Social Security Board of Trustees, the Trust is expected to have depleted its more than $2.8 trillion cash stockpile by the year 2034, at which time benefits may need to be slashed by up to 21% to sustain the program for future generations.

The interesting aspect of Social Security’s long-term problem is that more than a dozen solutions exist. Not every solution that’s been proposed would fix the budgetary shortfall in its entirety, but each would at least make some headway. The holdup is in finding a generally acceptable solution at a time when both political parties in Congress are at their wits’ end with one another.

President Trump pledged throughout his campaign that he wouldn’t be making changes to Social Security. Instead, Trump’s plan involves improving economic growth so as to collect more revenue via the payroll tax. Trump believes that by reducing and simplifying taxes for individuals and corporations, announcing a $1 trillion, 10-year infrastructure spending bill, renegotiating America’s trade deals, and promoting the domestic energy industry, he’ll be able to boost U.S. GDP growth enough to increase incomes and therefore payroll tax revenue. Whether or not Trump’s plan will work remains to be seen.

Here’s how Social Security can be great again

However, a genuine fix for Social Security doesn’t require any arm-twisting — it only needs balance. A combination of three factors could make Social Security great again for future generations of retirees.

1. Increase revenue by adjusting the payroll tax earnings cap

The first step to fixing Social Security for many future generations to come involves generating more revenue for the program. There are really two ways to do this, but one method has a substantially higher approval rating than the other.

One method would be to increase payroll taxes across the board for all working Americans. The Trustees report listed an actuarial deficit of 2.66% in 2016, suggesting that a 2.66% increase in the payroll tax should sustain the program without the need for benefit cuts through the year 2090. The problem with enacting an across-the-board hike is that it’s a potential burden on lower-income and middle-class individuals and families.

The considerably more popular approach, based on polling, would be to adjust the payroll tax earnings cap.

In 2017, workers pay a 12.4% payroll tax on wages of between $0.01 and $127,200 (this 12.4% is often split down the middle between you and your employer). Any wages earned above $127,200 are exempt from the payroll tax. What this means is more than 90% of all working Americans are paying into Social Security with every dollar they earn, while wealthier folks are only paying into Social Security on a percentage of their annual income.

Two potential fixes include raising Social Security’s maximum taxable earnings to a higher level and eliminating the payroll tax earnings cap in its entirety. According to the “Voice of the People” survey, eliminating the payroll tax earnings cap would cut the budgetary shortfall by 66%. Since only 7% of the population would be affected by raising the payroll tax beyond its current level of $127,200, the idea of raising it or eliminating it is rightfully popular among the public.

2. Gradually increase the full retirement age

As revenue is increased on one end, minor benefit cuts should be accepted on the other for future retirees.

A few of the proposals to control Social Security’s expenditures have included freezing benefits for the wealthy; freezing the purchasing power of benefits of all recipients; and switching the measure of cost-of-living adjustments (COLA) from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to the Chained CPI. The Chained CPI takes into account the idea of “substitution.” In other words, if one good or service becomes pricy, the consumer will simply substitute it for another less-expensive good or service. The CPI-W doesn’t take this into consideration. Long story short, the Chained CPI would lead to smaller COLA increases for seniors.

None of these proposals is particularly well liked by the public. However, one cost-cutting idea has drawn the support of nearly four in five Americans according to the Voice of the People survey: raising the full retirement age.

Your full retirement age is the point at which Social Security deems you eligible to receive 100% of your monthly retirement benefit. Filing for benefits before you reach this age means a permanent reduction in your monthly payout, while waiting to claim benefits until after you hit your full retirement age will lead to a bigger payout.

Currently, Social Security’s full retirement age is increasing by two months per year until 2022, when it’ll reach 67 years of age for everyone born in 1960 and after. Gradually adjusting the full retirement age higher to age 68, 69, or 70 would coerce healthier seniors to stay in the workforce longer and presumably add extra payroll tax revenue to the program. It would also take into account the fact that life expectancies have risen by roughly nine years over the past five decades.

Though raising the full retirement age essentially means a pay cut for all working Americans when they retire, it has plenty of support from the public.

3. Encourage Americans to save

The final way to make Social Security great again is to adjust the saving and investing habits of working Americans.

According to the Social Security Administration, Social Security benefits are only designed to replace about 40% of a person’s working wages. Yet we know from the data that the program is being leaned on heavily by millions of seniors. Much of this blame comes down to the paltry national household savings rate in the U.S. of just 5.5% as of Nov. 2016. This is down by more than 50% from 50 years ago, and it’s substantially lower than what citizens in other developed countries save.

In order to make Social Security great again, we have to ween the American public off of relying so heavily on its benefits. How do we do that? Though there are countless ways, I’d opine that easing some of the key restrictions on retirement accounts ought to do it.

For example, the Traditional IRA and Roth IRA are both incredible tools to help consumers save for retirement. The Traditional IRA, which is funded with pre-tax dollars, can reduce a person’s current-year tax liability, whereas the highly popular Roth IRA, which is funded with after-tax dollars, allows an account holder’s money to grow completely tax-free for life. The problem with both IRAs is their annual contribution limit of $5,500 for workers aged 49 and under, and $6,500 for those aged 50 and up. If these limits were higher, we’d probably see workers pour more savings into Roth IRAs.

It seriously could be this simple: increase revenue, cut benefits modestly for future retirees, and encourage better saving and investing habits.

Your move, Congress.

Social Security Is Failing Because the Program Is Antiquated

My Comments: This is far and away the most coherent overview I’ve read that addresses the problems faced by Social Security going forward. Now we have to convince the politicians that it’s in everyone’s best interest to take remedial action.

Sean Williams | Apr 8, 2017

The data doesn’t lie: a majority of seniors rely on Social Security to meet their month-to-month expenses come retirement. According to the Social Security Administration (SSA), 61% of retired workers currently receiving benefits counts on those benefits to comprise at least half of their monthly income.

But this vital source of retirement income is also causing retired workers, pre-retirees, and tens of millions of working Americans grief. The latest annual report from the Social Security Board of Trustees estimates that the program will begin paying out more in benefits than it’s receiving each year in revenue by 2020, eventually resulting in the depletion of its more than $2.8 trillion in spare cash by 2034. If this spare cash is completely exhausted, the Trustees have implied that a benefits cut of up to 21% could be needed on an across-the-board basis (i.e., for current and future retirees) in order to sustain payouts through the year 2090. That’s not a comforting outlook for the aforementioned majority of retired workers who count on Social Security each month.

Social Security’s biggest problem is that it’s antiquated

If there’s one thing Social Security isn’t short of, it’s finger-pointing as to why the program is headed down an unsustainable path. Some blame the baby boomer generation for their poor saving habits and early Social Security claims, which are expected to weigh heavily on the worker-to-beneficiary ratio. Others point to lengthening life expectancies, or the political divide in Washington. There’s no shortage of blame to go around.

However, the real blame for Social Security’s seemingly imminent budgetary shortfall can probably be placed on lawmakers who’ve chosen to allow an antiquated program to take care of our nation’s retirees.

Social Security was signed into law more than 81 years ago in Aug. 1935. When the first payment was made in 1940, senior citizens weren’t living anywhere near as long as they are now. Additionally, the costs that comprised a good chunk of today’s expenditures for retired workers (housing and medical care) weren’t outpacing inflation by much, if anything, in the 1940s.

The last significant overhaul to the Social Security program came during the Reagan era with the passage of the Amendment of 1983. These Amendments introduced the taxation of Social Security benefits, and increased the full retirement age (the age at which an individual becomes eligible to receive 100% of their monthly benefit) in the decades to come, to name a few of the changes.

While there have been some changes to the Social Security program since 1983, there’s been no major overhaul to the extent of the 1983 Amendments.

Now, here’s what today’s seniors are left with.

1. The taxation thresholds haven’t been adjusted for inflation in 34 years

The first issue is that the income thresholds that define what portion of Social Security benefits are taxable haven’t been updated in 34 years to account for inflation! When first introduced in 1983, individuals with earned income over $25,000, and joint filers with earned income above $32,000, could have 50% of their Social Security benefits taxed by the federal government. A decade later, the Clinton administration added another tax tier, allowing 85% of Social Security benefits to be taxed if a recipient’s annual income topped $34,000, or $44,000 for joint filers.

In 1983 and 1993, these taxation changes affected around 1-in-10, and nearly 1-in-5 households with seniors. By 2015, according to The Senior Citizens League, 56% of seniors owed at least some tax on their Social Security benefits. Had these thresholds kept pace with inflation, individual tax filers wouldn’t be hit until $57,107 (in 2015 dollars), and couples until $73,097.

2. The full retirement age hasn’t kept pace with life expectancy increases

Another issue with the Social Security Amendments of 1983 is that they phased in a two-year full retirement age increase over what amounted to a four-decade period. Beginning in 2017, the full retirement age will rise by two months per year, ultimately moving from age 66 to age 67 between 2016 and 2022 (the full retirement age of 67 applies to anyone born in 1960 or later). In other words, between 1983 and 2022, the full retirement age will have increased just two years.

However, actual life expectancies since 1983 have risen at a quicker pace. Data shows that the average life expectancy in 1983 was 74.6 years, compared to 78.8 years in 2015 according to the Centers for Disease Control and Prevention, an improvement of 4.2 years in 32 years. A slower-growing full retirement age means retired workers are potentially collecting Social Security for a longer period of time than ever before, which is weighing on the program.

3. More income than ever is escaping Social Security’s payroll tax

It’s probably also fair to say that quite a bit of wealthy Americans’ income is escaping Social Security’s payroll tax. As a refresher, Social Security’s payroll tax, which totals 12.4% and is often split down the middle between you and your employer, covers earned income between $0.01 and $127,200 as of 2017. This means earned income above and beyond $127,200 is free and clear of the payroll tax.

However, a quick look at the SSA’s wage distribution statistics from 2015 shows that 137,545 people earned at least $1 million. These individuals would have paid an aggregate of about $16.3 billion in payroll taxes in 2015 (based on the cap of $118,500 that year). However, these millionaires earned an aggregate of $340.8 billion in income in 2015. That’s over $324 billion dollars that escaped taxation because the maximum taxable earnings cap has been stuck growing at a snail’s pace (it’s tied to the Average Wage Index). And remember, I’m not including earned income between $118,500 and $999,999 in these figures, either. In other words, the program could be bringing in a lot more money for future generations of retirees if the payroll tax cap were adjusted.

4. Social Security’s COLA is inadequately taking into account the high expenditures seniors face

Lastly, the cost-of-living adjustment (COLA) that seniors receive most years (i.e., their inflation-based raise) isn’t coming anywhere close to reflecting the true inflation they’re dealing with when it comes to housing costs and medical care inflation. A quick review of medical care inflation and Social Security’s COLAs over the past 35 years shows that medical care inflation was higher in 33 of 35 years. This makes it practically impossible for seniors to make do with what they’re being paid since more of their income is going to pay for their medical care with each passing year.

Lawmakers are attempting to make a program that was developed in the 1930s and tinkered with heavily in the 1980s work for seniors in 2017 — and it’s clearly not working. Change can only come from Washington, but that’ll only happen once lawmakers realize that a good portion of the program, both from the revenue and benefits sides of the equation, needs to be refreshed for today’s senior citizens.