Oct 30, 2020 4 min read

It is time to discuss another important retirement asset, Social Security. Many seniors are worried and concerned. There have been some misleading campaign ads on this important topic. Today, we concentrate on the retirement aspects of SS.

SS has always been a program in which current workers pay for the benefits of already-retired workers. Washington did not provide a large starting expenditure to kick off the program.

When it started, Social Security provided only retirement benefits to a retired worker when he or she reached 65. Life expectancy at that time was just a few years longer, which made it easy to fund the program. Originally, there were not extra benefits such as spousal payments.

When baby boomers were working, they were contributing a surplus to the trust fund. Both workers and their employers pay half of the 12.4% payroll tax, which generated enough money to cover payments made and to contribute to the trust fund. Now, however, 10,000 boomers are turning 65 every day. As they start receiving benefits, the trust fund has started to supplement income from current wages.

Every year, the government is required to project many years of future solvency of the trust fund. Currently, the fund will run out in 2035. At that time, it is projected that benefits would have to drop to about 78% of normal benefit. This 78% would be coming from incoming payroll taxes.

The pandemic has created additional stress on the system. With the unemployment rate increasing, there are fewer workers contributing to the fund. Also, some people may decide to retire sooner than they would have. This means they may be collecting benefits instead of paying in to the reserves.

This situation was going to happen in 1985. Two years before, in 1983, President Ronald Reagan and Speaker of the House Tip O’Neal reached an agreement that kept the system working until 2035. That will be for almost 50 years. At that time, the retirement age was increased from 65 to 66 or 67. Taxes went up for employee and employer and up to 50% of SS benefits became taxable for upper-income workers.

Both parties have been playing political football. They could repair the system in a day if they would work together.

Possible adjustments would include raising the tax rate, increase the age to start benefits, adjusting cost of living, maybe taxing the whole benefit for higher-income families, and maybe changing the level of income that is taxable.

With longer life expectancy, most people get a very good return on their investment into Social Security. The changes would be spread out over a large percentage of the population and not be too harmful to any group. The sooner the changes are done, the more people will share in the process and the adjustments can be smaller.

Social Security and Medicare are mandatory expenditures of the government. The benefits must be made to the recipients. It takes a super majority of 60 votes in the Senate to make major changes. Washington will fix these problems, because none of legislators can get reelected if they do not.

These two programs are responsible for almost 60% of the government’s budget each year. There is some very early talk of looking at the way Australia and New Zealand fund their retirement programs. This will need further study and bipartisan support.

We should fix the current system for now and do a more extensive study of possible structural changes down the road.

Gary Boatman is a Monessen-based certified financial planner and the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”

To submit columns on financial planning or investing, email Rick Shrum at rshrum@observer-reporter.com.