Younger generations are being left behind by Social Security as baby boomers retire and live longer.
by Joe Zingone, CFE, MS
The federal government has established tax incentives to encourage employment-based retirement benefits and individual savings like 401(k) and IRAs. However, Social Security is the primary source of support for those retirees, making it the most extensive program in the budget. It is a vital safety net for millions of citizens, but its future may be uncertain if the current law isn’t changed. All workers contribute through a dedicated payroll tax to ensure that they will receive benefits at retirement or in case of disability. With an aging population, though, fewer people are paying taxes to cover each Social Security recipient, weakening the system’s financial stability.
If policymakers fail to act, 71 million beneficiaries could face across-the-board benefit cuts of about 25 percent when the Old Age and Survivors Insurance and Disability Insurance (OASI) trust fund is depleted in ten years or so.
Social Security’s finances could be put on a long-term sustainable footing by implementing the following:
· Tax Social Security more by raising the amount you and an employer pay from its current rate of 12.4% (half paid by employees, half by employers).
· Increase the cap on taxable earnings (currently $147,000).
· Retirement age should be increased (again) and indexed to life expectancy to account for future gains in average longevity above the current age of 67.
· Benefits adjustment options by reducing benefits for high earners with increasing benefits for lower earners.
· Change the cost-of-living index over time to slow down retiree benefits growth. According to many economists, Social Security uses an index that overstates inflation, which causes benefits to grow faster than the actual cost of living. They propose to replace the current index with chained-CPI, a more accurate measure of inflation. (That change would also apply to other inflation-indexed federal retirement programs and tax provisions.) For additional information on the chained-CPI see my Medium article.
Factors to consider (spread the pain)
Congress faces the challenge of preserving the retirement system in a fiscally sustainable way that would strengthen support for those who need it the most while recognizing the limited ability of retirees and near-retirees to adjust to major disruptions in their financial circumstances.
For that reason, proposals often exempt workers aged 55 and over from any reduction in benefits and gradually phase in reductions for younger people to give them time to accumulate more resources for retirement via pension plans or other savings. Congress must act sooner rather than later so they will have more reasonable options, which can be implemented gradually to reduce their impact on individuals. Delay limits options and makes reform more difficult.
No matter what happens in Congress, be prepared to get less, and pay more for it!
Reach out if you have any specific questions about the article. Cut and paste my calendar link into your browser: https://calendly.com/talktojoez or Email Joe@JoeZingone.com
