Can We Save Social Security?

I get a little update in the mail every year that tells me how much I should expect to see from Social Security… it gets me thinking… do people actually rely upon this “ponzi -scheme” or are they taking control of how they live in their retirement years…

With Social Security predicted to reach insolvency within 30 years from today, lawmakers agree that something needs to be done…. and fast.  They even agree on the broad outlines of a solution.

Unfortunately, non of the proposals currently under consideration is likely to be poplar to the masses.  “Congress is going to have to tell people things they don’t want to hear.”  says David John of the Heritage Foundation, aconservative think tank.

A big part of the problem is that the population is getting older.  As a result, there are fewer people of working age to support each retiree.  Here are the most likely options for Social Security reform:

1.  Increase Taxes

Right now, employees pay a 6.2% Social Security tax on income up to $106,800 (the “income cap”).  To generate more revenue, Congress could increase the rate at which income is taxed, raise the income cap, or add a new tax on income above $250,000.  President Obama proposed this last idea during his Presidential campaign, but conservative economists say it would not dent the Social Securit defiicit. 

More likely is a modest increase in either the payroll tax rate (from it’s current rate of 6.2% ) or the income cap (from $106,800).  Raising the cap is popular among Social Security reformers but would increase the tax burden on the middle class, since more of their income would be subject to the tax.  Raising the payroll tax rate would disproportionately affect lower-income workers.

2.  Change future benefits

Altering the way benefits are calculated could be a powerful tonic for Social Security’s fiscal mishaps.  “Financing current benefits isn’t such a big problem.”  says Rudolph G Penner of the left leaning Urban Institute.  “The problem is financing our promise of ever-increasing benefits.”

The current system ties benefits to wages:  As people’s salaries increase, Social Security benefits grow.

Under a popular idea called “price indexing,” consumer prices would be factored in, too.  Benefits would increase more slowly, since prices tend to rise at a lower rate than wages.  The idea may sound innocuous, but critics have said it would change the very nature of Social Security and result in significant benefit decreases for people entering the system in the future.

3.  Raise the Retirement Age

Of all the proposals under consideration, pushing back the retirement age seems the most likely to happen.  People are staying in the workforce longer anyway, and the retirement age is already rising gradually — from 65 to 67 by 2027. Proposals are circulating to accelerate the jump to 67 by 2020.  Requiring people to work longer before collecting Social Security doesn’t generate quite the ideological division tax increases do and doesn’t tamper with future benefits as price indexing would.

Like mentioned before, the population is getting older and the ratio of workers to social security beneficiaries has dramatically decreased since 1960 and will continue to do so over the next couple of decades as referenced in the graph to the right.

So with “Reform” the name of the game these days and any Social Security reform package is likely to contain some or all of the above ideas.  And it had better happen soon.  Experts agree the longer we wait, the more difficult it will be to solve the system’s financial ills.

David M Certner of the AARP believes that talk of a Social Security crisis is overblown.  Still, he agress that changes to the system are inevitable and says they should come sooner rather than later.  “The sooner you make them,”  he said, “the more modest the changes that are needed.”

Are you relying solely on Social Security as your retirement game plan?  Do you have a game plan?  Have you learned the benefits of a self directed retirement plan?  Contact me for more details on how to utilize a self directed ira or a self directed 401k for your business or enterprise.