We finally have a little movement on Social Security reform! Sometime this fall, the House will introduce legislation and hold a vote in order to keep the Social Security Trust Fund solvent through this century.
What is Social Security?
Social Security is a benefit program introduced during FDR’s presidency. You pay into the program via payroll taxes, commonly referred to as FICA, and then receive a specified amount during retirement.
Social Security also provides disability payments for those who can’t work, as well as spousal benefits for widows/widowers.
The calculation that determines your monthly benefit takes into account your 30 highest-earning years, with at least 10 years, or 40 quarters, needed to qualify.
If you are short a quarter, a year, or more, SSA uses $0 for that period of time, which can drastically reduce your monthly benefit.
That’s enough about the nuts and bolts, let’s dive into the current program, followed by the new legislation.
How healthy is the current program?
It depends on how you define healthy. Currently, the Social Security Administration is paying out more than it’s taking in.
Social Security has a reserve fund that they go to in order to make good on payments. That reserve fund is set to run out in 2035. Now that does not mean that Social Security is doomed!
If nothing is done, the reserve will run out and then benefits will have to get cut. Most calculations are saying a 15%-25% reduction.
The current set up for Social Security is like this:
- People born before 1946 – Full-retirement age (FRA) is 65.
- People born between 1945 and 1965 will see a 2-month increase in their FRA each year with the cap at 67.
- Anyone born after 1964 – FRA is 67.
- Current FICA taxes are 6.2% for employees and 6.2% for employers.
- Maximum taxable earnings – $132,900 – Anyone who makes more than that does not pay FICA taxes.
Full retirement age (FRA) is the age you must attain in order to receive your full benefit. If you apply early, your benefits are reduced, and if you put off receiving those benefits, you’ll get more.
With that said, let’s get into the new legislation.
Proposed legislation
There are four parts to this new law, which is called the Social Security 2100 Act.
- First change – FICA is going up to 7.4% for employees and 7.4% for employers
- Second – Maximum taxable income is going up to $400,000
- Third – Benefits will see a 2% increase
- Four – SSA will use a new index to adjust benefits for the cost of living
My thoughts
This has been a long time coming. The Federal Government desperately needed to act in order to ensure Social Security would be here for the coming generations.
While I like the changes that have been proposed, I have two things I want to gripe about.
One, the 2% bump in benefits was not necessary. Though the Cost of Living Adjustment (COLA) has been minimal in the last few years, it still exists. Benefit recipients will continue to see an increase in benefits.
Two, they did not address the retirement age. As I mentioned, the current FRA is 67. With current life expectancy nearing 80 and improvements in medicine coming every day, this should have been increased, as well as the age cap for collecting benefits.
You have to take benefits when you turn 70, whether you want to or not. If we are living longer, FRA and the age cap should go up. Either way, I’m glad we’re starting to see movement on this front.
Here are some sources and some related reading:
Future Financial Status of the Social Security Benefit Program
When Should I Take Social Security?
Will Social Security Run Out Of Money?
Tips for Avoiding Social Security Disability Denial
Jacob Sensible is a financial advisor with decades of experience in the financial planning industry. His journey into finance began out of necessity, stepping up to support his grandfather during a health crisis. This period not only grounded him in the essentials of stock analysis, investment strategies, and the critical roles of insurance and trusts in asset preservation but also instilled a comprehensive understanding of financial markets and wealth management. Jacob can be reached at: jake.sensiba@mygfpartner.com.
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