Sanford C. Leestma II, CFP®

Senior Wealth Management Advisor

Is Our Security Secure?

President Trump and Vice President Biden have provided some direction on what changes they would like to see in the funding of Social Security, but they have largely avoided any substantive proposals. Regardless of which one is president come November, funding of the social program will need to be addressed. The issues surrounding Social Security, like many things, have been exacerbated by the coronavirus pandemic, and proposals for solutions will be needed sooner than later. While both candidates have touched on the subject to varying degrees, no meaningful dialogue has occurred to address the heart of the issue. Joe Biden has proposed an increase to the payroll tax and, for some, an increases to benefits. Donald Trump, by executive order, has implemented a payroll tax holiday. In a previous article in this newsletter, focusing more broadly on the 2020 election, Nicholas Juhle discusses potential Biden policy implications and outlines some of Biden’s proposals, including changes to the tax code. My article takes a deeper dive into the proposed changes to Social Security and its implications to benefits.

Biden would like to increase the payroll tax for individuals earning $400,000 and above. This year, wages of up to $137,700 are taxed at 6.2%, for both the employer and employee. With Biden’s plan, the 6.2% payroll tax would begin again on wages over $400,000. This effectively creates a “donut hole,” where wages between $137,700 and $400,000 are not taxed. Biden would then like to increase benefits for the lowest income individuals by increasing the special minimum benefit (meant to increase the adequacy of benefits for regular long-term, low earning covered workers and their dependents or survivors) to an amount equal to 125% of the federal poverty line (i.e. $1,329 per month or $15,948 per year in 2020). Also, the plan would implement a 5% increase in benefits (based on the average wage index of $52,146 in 2020) for those that have longevity. While this plan is designed to benefit lower income more than high income individuals, it increases benefits for all who live a longer life. The 5% would be spread evenly over years 16 through 20, of the individual claiming benefits. A Social Security planning tool, MaxiFi Planner, can help illustrate the impact that a 5% increase would have on individuals at different income levels. This analysis calculates how much one can spend at full retirement age, based on the proposed increase. For individuals earning the average wage of $52,146, the five year increase in benefit equates to an annual increase in spending of 2.93%. For individuals earning half of the average wage ($26,073), the increase in spending is 5.34%, a greater increase since the 5% increase is based on the average wage index. For incomes above the average wage, the additional spending diminishes because of the tax imposed on Social Security benefits for higher income individuals. Biden would also like to increase survivor benefits for widows and widowers by 20%, as well as a few other less wide sweeping adjustments to Social Security.

Trump has not yet released his plans for Social Security funding. In his book from 2011, Time To Get Tough, Trump supported gradually raising the full retirement age to 70. He has also looked for faster economic growth to help with the Social Security funding deficit. Hopefully, we will hear more on his plan in the near future. In regards to Social Security, what he has done recently is put a payroll tax holiday in place through an executive order. Its intent is to help financially distressed Americans and to help the struggling economy, since Congress is deadlocked on any further coronavirus relief. During the Great Recession, President Obama implemented a 2% payroll tax reduction to help workers as the economy recovered, but Trump’s plan has not gotten the bipartisan support Obama’s plan received. Some say it is because he hasn’t come out with a plan, and this tax holiday could signal additional cuts to the payroll tax in the future. Trump’s order defers payroll taxes from September 1st through December 31st, if an employer agrees to it, but many have hesitated to do so. The deferral is, however, mandatory for federal employees and military service members. The tax holiday applies to individuals who make less than $4,000 bi-weekly ($104,000 per year). Workers are supposed to repay the deferred tax from January 1st through April 30th of next year, but Trump has said he would like to forgive or terminate the deferral if he gets a second term. This termination of payroll taxes would take Congressional action, so it is uncertain if they could be avoided. Suspending the payroll tax is potentially the fastest way for the federal government to get needed monies to low income individuals, but it does come with some caveats which could be expensive to the employer. Also, if the intent of the tax holiday was to help those that are financially distressed, the deferral doesn’t really help to alleviate the pain endured by laid-off workers.

More needs to be done. Even before the pandemic, it was estimated that Social Security benefits would draw down the Federal Old-Age and Survivors Insurance Trust Fund starting next year, since payroll taxes will not keep pace with benefits being paid out. Taking into account the recession brought on by the pandemic, the Congressional Budget Office (CBO) has estimated that the program’s fund will be exhausted in 2031, one year earlier than previously projected, and reserves for disability benefits will likely run out in 2026, instead of lasting though the end of the decade. The CBO goes on to say that annual benefits, once funds are exhausted, would be reduced by about 25% in 2032 and by 31% in 2050. Since the funds would be depleted, the benefits would equal the proceeds from the payroll tax. Social Security Chief Actuary, Stephen Goss, estimates that a permanent payroll tax elimination could deplete the program’s funds in 2023, and reserves for disability benefits could run out as soon as the middle of 2021. When the funds run out, Congress will have to raise the payroll tax or tap into the general fund. The Social Security Administration’s trustees have said that the payroll tax would need to be increased by 3.14% to 15.54%, to restore solvency. Looking to the general fund is a possibility but not palatable given the current debt levels. Income taxes could be raised, and the revenues could be used to pay for Social Security, but utilizing the general fund instead of a payroll tax would delink employer contributions from the future benefits received. The President of Social Security Works, Nancy Altman, says “Breaking the link between contributions and, with it, the self-help, earned-benefit nature of Social Security would end the program as we know it.” It will take either additional taxes, whether payroll tax, income tax, or increased tax on Social Security itself, or a reduction in benefits, or raising the age of full retirement. Maybe it will take a combination of approaches. Whatever it is, our leaders need to seriously address this issue and find a resolution sooner than later. There will need to be give and take, and it’s likely no one will be happy with the solution. Ahh… politics.

COVID-19 Updates

As of October 25

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