William Reichenstein, Social Security Solutions Raising the income limit on the payroll tax would violate the basic principles of Social Security, Reichenstein says.

It’s no secret that the Social Security trust fund is expected to run out in 2035. Yet during his blustery term, President Donald Trump has failed to present a formal plan to fix, aka reform, the system. Enter: Joe Biden, presumptive Democratic presidential nominee, sounding an alarm for “urgent action” to “preserve and strengthen” this critical program. He has proposed the framework for a plan to meet those twin goals.

However, Social Security authority William Reichenstein argues that Biden’s ideas are unrealistic, even “irresponsible,” in promising added benefits when the government won’t even be able to meet existing ones.

In an interview with ThinkAdvisor, the expert on the nexus of investments and taxes recommends other options.

The Baylor University professor emeritus, head of research at Social Security Solutions, Inc. and Retiree, Inc., contends that Biden’s plan would convert the retirement-income portion of the Social Security system to an “income-distribution plan” that would negatively impact the wealthy.

In contrast, the moves he favors are “in the spirit of a required-savings program,” which, he says, is the system’s original design.

The main thrust of his proposal is to raise all employees’ Social Security payroll tax. That’s the “fairest” way for the government to make good on promised benefits, he insists.

In the interview, he discusses that idea, while dismissing those of Biden, which, he says, would increase income tax for high earners but provide scant additional benefits to them.

Reichenstein has published more than 190 articles and authored a number of books, of which “Income Strategies” (2019) is the most recent. It’s a how-to on creating tax-efficient withdrawal strategies for retirement.

He is a principal of both Social Security Solutions, which creates software that turns his strategies into tools for making optimal claiming decisions, and Retiree Income, which produces “Income Solver” software to help advisors counsel clients on combining smart claiming decisions with tax-efficient withdrawal strategies.

ThinkAdvisor recently interviewed Reichenstein, speaking from Waco, Texas. Part of the discussion entailed two strategies that can help strapped workers obtain immediate income prior to their planned retirement by claiming Social Security benefits retroactively.

Here are highlights:

THINKADVISOR: Presumptive Democratic presidential nominee Joe Biden aims to put the Social Security system “on a path to long-run solvency” and “strengthen benefits for the most vulnerable older Americans,” according to www.JoeBiden.com. He would do away with the earnings cap on Social Security taxes; that is, ask “Americans with especially high wages to pay the same taxes on those earnings that middle-class families pay.” Your thoughts?  

WILLIAM REICHENSTEIN: He doesn’t give specifics. But two recent proposals by other [politicians] that say let’s get rid of the income cap and tax earnings above a certain level essentially wouldn’t provide additional benefits for doing that. This would be fundamentally transforming the retirement-income portion of Social Security into basically a strong income-redistribution plan.

Why do you oppose that idea?

The goal of Social Security is to provide a minimal income to career workers. It’s individuals’ responsibility to save additional amounts if they want more than this basic income in retirement. That’s why we’ve always had an income limit on the amount of earnings subject to Social Security tax. Biden’s proposal, like [recent similar ones], violates the principle of Social Security’s being a required-savings program.

What specifically do those other plans call for? 

[Senator] Bernie Sanders’ plan proposed applying the 12.4% [Social Security combined tax paid by employer and employee] on earned income that exceeds $250,000 and basically paying no additional benefits for that. He also proposed applying the tax on unearned income — interest, dividends, capital gains — exceeding a certain amount but, again, paying no [meaningful] additional benefits.

Former Vice President Biden says his plan would “revolutionize Social Security’s minimum benefit, which has deteriorated over time to the point of being entirely ineffective.” He proposes that those who “spent 30 years working will get a benefit of at least 125% of the poverty level.” What’s your take on that?

The government can’t meet the benefits it has already promised. Therefore, it would be irresponsible to promise additional benefits. Looking at those other plans, the only way to do that is to have massive taxes on income above the current income limit — the income cap — with basically no additional benefits provided.

What do you think of Biden’s idea to raise benefits for people who have been receiving Social Security for at least 20 years?

How are you going to come up with money for that? The only way is to get rid of the earnings cap and give essentially no benefits for all those additional taxes paid.

Biden’s plan also calls for doing away with the Government Pension Offset and the Windfall Elimination Provision, which affect Social Security benefits paid to state and local government workers in jobs that don’t require payment of Social Security taxes. Do you go along with that part of his plan?

I disagree. It’s inappropriate. The system pays those employees as if they’re low-income employees. But they aren’t.

How, then, would you categorize them?

They’ve chosen to work at jobs that don’t require paying Social Security tax. Therefore, they shouldn’t get paid Social Security benefits as if they’re low-income employees. Hillary Clinton [as Democratic presidential nominee in 2016] wanted to pay people who work at home taking care of kids as if they were in the [labor] force. As it is, we don’t have enough [funds] to meet all our promised payments for employees that pay into the system. Don’t take our money and give it to people who haven’t done that.

What has President Donald Trump proposed for reforming the Social Security system?

I haven’t seen a serious proposal from him on how to solve Social Security’s problems. He recently said something about reducing the [Social Security] payroll tax below the current level. But I believe that was for a temporary decrease during the COVID-19 pandemic.

What are other proposals for saving Social Security?

There are [a few] ways to pay for promised benefits [in the future]: One is raising the payroll tax, and the other is reducing benefits to about 79% of those promised. That would be for all Social Security recipients after the [Social Security] trust fund has been exhausted.

Which do you think would be the most effective?

I believe that raising payroll taxes is a better alternative than a plan that would turn to an 80-year-old grandmother that’s depending on promised benefits and tell her we’ll have to reduce those benefits to 79% of what you were promised.

Still, workers would find raising payroll taxes objectionable.

I wish it weren’t necessary, but it’s in the spirit of a required-savings program. If worse came to worst, it’s better than fundamentally changing the retirement-income portion of the Social Security system into an income-redistribution plan. If we need to raise the amount of the payroll tax from 12.4%, then let’s raise it. Everybody would pay more. Right now, we’re talking about 3.2%.

Are there any other options?

We could raise the full retirement age by tying it to life expectancy. People are living longer now. Social Security is designed to pay a [continuous] real benefit for the rest of your life. That’s a real annuity. So with life expectancy going up, to be prudent you’ve got to follow annuity principles.

What would be necessary to effectuate that plan?

As life expectancy increases, in order to pay the same amount, you need to have people start later. That would mean extending full retirement age from the current 67 for people born in 1960 and later.

Any other alternatives?

We could increase the income cap for higher income people and provide benefits for that. I think that with a combination of [most of] those changes, we could meet promised benefits.

You just mentioned longer life expectancy. Suppose a pre-retiree finds they have a much shorter life expectancy because they’ve had COVID-19 or have been diagnosed with a terminal illness and are likely to live only a year more. Is there a strategy for them to start claiming benefits earlier?

Yes. They could file for up to six months of retroactive benefits, as long as it doesn’t take them back to before their full retirement age [FRA]. For example, if someone has an FRA of 66 and six months, they could file in July for benefits as if they began taking them from January and thus receive six months of benefits retroactively.

What’s another example of using that strategy?

Consider a single woman who loses her job this year because of the coronavirus pandemic. She needs income. What can she do? If she’s 68, and thus six months beyond her FRA, she could file for six months of retroactive benefits at the 67-and-six-months benefit level. That way, she would receive six months of benefits in one lump-sum payment.

Any downside to that?

Her Social Security benefit level will be permanently lower than it would have been had she not filed for retroactive benefits. So it’s a trade-off: She’ll get six months of benefits today, but the benefits for the rest of her life will be lower — and the cost of living will be higher.

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