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Retirement Planning > Social Security

A Plan to Save Social Security Without a Tax Hike on the Wealthy

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Social Security authority William Reichenstein has a way to fix the “broken” government retirement and disability benefits program, as he so frames it. Indeed, his way is 180 degrees from the reforms proposed by prominent politicians who mainly want to tax the wealthy and pay those funds mostly to lower income people, Reichenstein argues in an interview with ThinkAdvisor.

Forecasts hold that the Social Security trust fund will run dry in only 16 years. Hence, the system must be reformed — either by raising taxes or reducing benefits, Reichenstein says.

The Baylor University professor emeritus and head of research at Social Security Solutions focuses on the interaction between investments and taxes.

This past spring he released new research assessing Social Security reform proposals and put forth his own two-tier plan for how to restore health to the system. The research appeared in the May issue of the Journal of Retirement.

Focused on reducing Social Security’s income-redistribution elements, Reichenstein contends that reform proposals by former Gov. Chris Christie of New Jersey; Rep. John Larson, D-Conn.;  and Sen. Bernie Sanders of Vermont, a Democratic presidential candidate, are “unfair” to the wealthy.

In October, the chartered financial analyst is scheduled to speak at the Financial Planning Association’s 2019 conference in Minneapolis. This coincides with publication of Reichenstein’s new book, “Income Strategy,” which explores his tax-efficient withdrawal strategies for retirement income.

Social Security Solutions — whose clients include BlackRock and Vanguard — turns Reichenstein’s strategies into software tools designed to make optimal claiming decisions.

ThinkAdvisor recently interviewed Reichenstein, who was speaking by phone from Waco, Texas. The Social Security expert insists that reform must occur. More than once he quoted President Franklin Delano Roosevelt, who signed the Social Security Act into law in 1935:

“The Act does not offer anyone … an easy life — nor was it ever intended so to do,” Roosevelt said.

Here are excerpts from our interview:

THINKADVISOR: In a December 2016 interview with me for ThinkAdvisor, you likened the Social Security trust fund’s running out of money to a speeding train heading toward a mountain crash. What are the actual stakes? 

BILL REICHENSTEIN: If we don’t do anything, when the trust fund runs out of money, which is estimated to be in 2035, the Social Security Administration would have to use tax revenue coming in to pay current beneficiaries. The estimated deficit is about [$43 trillion; in 2018 it was $34 trillion] based on promised benefits. But the Social Security Administration doesn’t have the authority to borrow money.

What are the chief options to reform the system in order to prevent a disaster?

One way is to raise taxes; another is to reduce benefits. But it would be very difficult to reduce benefits.

What do you think of the proposals that some politicians have put forward?

[Former] Gov. Chris Christie’s plan calls for means-testing: [The scenario would be:] You and I make the same income for the same number of years. You save; I don’t. His plan would take away money from higher income people who have saved and give it to others. That’s not fair. It’s an income redistribution plan. Social Security already has pretty strong income-redistribution features. The message of his plan is that if you save up income to supplement Social Security, you’ll be penalized by having your benefits reduced. That ain’t gonna work!

What about the other proposals?

Sen. Bernie Sanders and Rep. Peter DeFazio’s [Social Security Expansion Act] is [also] going to take money from the wealthy and give it to lower-income people. Their plan is to tax unearned income — interest, dividends, capital gains — above a certain level and use the money to subsidize Social Security benefits. This is adding almost pure 100% income redistribution features. They want to tax earnings but grant no additional benefits for that.

There’s also Rep. John Larson’s Social Security 2100 Act. It proposes to increase benefits but to require payroll taxes for wages above $400,000.

This is really a redistribution plan, too. It says let’s raise the earnings cap.

How would you sum up these proposals?

They’re unfair. The whole idea of Social Security is that the government is going to require you to save a certain portion of your income so that you have a modest base in retirement to build your individual security — and we’re going to guarantee you this modest base. You’re not going to starve to death. But it’s not designed to provide luxury: If you want more than that in retirement, save it [on your own]. Proposals saying that we’re going to tax the wealthy and have that money go entirely to other people is not a required income savings plan. It’s an income redistribution plan.

How or where do people save money in “a required income savings plan”? 

It goes to the government and back into the trust fund. Eventually it will be used to pay the benefits the government has promised you.

What’s the focus of the plan you propose?

Social Security already has strong income redistribution features. I would like to reduce those. I propose a two-tier system. One is an [insurance] welfare component, which is a relatively small portion. I’m more than willing to take some of my income and pay it to people who are disabled and need help. But there are millions of state and local employees that are not part of the Social Security system — for example public school teachers in Texas — who don’t have to pay their share of those welfare benefits because they have their own retirement plans [through employers]. Everybody ought to pay for those [benefits]. We have to help the disabled who can’t work.

What’s the second part of your proposed system?

The retirement income portion. The benefits from that should be based on taxes paid into the system. There ought to be some relationship between benefits received and taxes paid. I want people to receive additional benefits based on the additional money they continue to pay into the system. So if they continue to work more than 35 years, their benefits will continue to rise.

Please explain the tax increase your plan calls for.

Raise taxes to make the [current] 12.4% payroll tax — of the first $132,900 of income — higher.  That is, [2.4%] of the payroll tax would go to finance the insurance portion of the system, and the remaining 10% would go to the retirement income component. This isn’t perfect, but it would be a whole lot better than raising the income limit.

All in all, then, do you think those who earn over a certain amount shouldn’t have to contribute, through taxes, to the Social Security benefits of people who don’t earn as much [apart from the disabled]?

Yes. That’s the idea of a required savings program. Someone at the lower income level is already going to get paid more than twice as much lifetime per dollar [benefits] than they pay in. So we’re already giving a great deal to lower-income people. And now they’re talking about transforming Social Security into almost entirely a redistribution [program] by taxing additional income, which is going to be paid mainly to the poor.

What might financial advisors recommend concerning Social Security to clients who are near retirement?

I would encourage them to base their decisions about benefits on what [the Social Security Administration] is currently promising them, though there’s no guarantee. But I think it would be very difficult for Congress to say, “Here’s this 80-year-old grandmother whose only income is Social Security, and we’re going to take away some of those benefits because the trust fund ran out.”

Has President Trump weighed in lately about the expectation that the trust fund will dry up? 

He hasn’t given any specific proposals that I have seen.

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