For decades, members of Congress have talked about changing, replacing or abolishing Social Security.
Pressure to dismantle the system continues today, even though 87% of Americans approve of Social Security, according to a July 2024 survey conducted by the National Institute for Retirement Security.
Keeping Social Security stable is critical for financial professionals who help clients with annuities and other retirement planning arrangements, because Social Security is an important part of the U.S. retirement planning universe.
Many clients know that Social Security benefits will make up a significant portion of their post-retirement income.
Even some of the highest-net-worth clients like knowing that a portion of their income will come from a government-guaranteed annuity.
What’s the clamor about?
Workers are supposed to fund Social Security by contributing to a trust fund.
The people working today pay a Social Security tax of 6.2% of their gross earnings, up to a limit of $176,100 in earnings, into the trust fund.
Employers also contribute 6.2% of a worker's gross earnings, up to the $176,100 limit, to the trust fund.
But the baby boomers are rushing to retire and are living longer, thanks to medical science.
There are not enough younger workers paying into the system to cover the cost of all of the benefits payments. Managers are dipping into the Social Security trust fund to fill the gap.
The trust fund is set to run out in 2035
If the tax cuts now being debated by Congress are passed, then the trust fund could run dry as early as 2031, and benefits could be reduced by 21%.
Could private companies run it better?
Some people say the system should be privatized. Keep in mind that the Social Security system spends a small amount to run the program, and yet it pays benefits with a high degree of accuracy. This makes Social Security one of the federal government's most efficient programs.
Is the problem fraud... or lack of babies?
Contrary to what some critics say, Social Security is not plagued by fraud, and the program is not sending benefits checks to 2 million dead people.
Vetting procedures that tie into Medicare and Medicaid systems help find and correct any inaccurate payments.
A 2024 report by the Social Security inspector general confirms that from 2015 to 2022 fewer than 1% of payments were incorrect. The majority of the errors were due to overpayments to living people.
The bottom line is that we did not have enough babies, and the babies we never had never entered the workforce.
The system needs more funding due to the lack of wage earners, not because it's a wasteful, fraudulent system.
Reforms?
Some people who want to fix Social Security say the program should be "means tested," meaning that retirees with income or assets over a certain level would not get benefits. This could cause serious hardship retirees in areas with a high cost of living.
Other reformers propose cutting the benefit payment amount and increasing the "full retirement age," or age when access to full Social Security retirement benefits begins.
The full retirement age has increased to 67 today, from 65 in the past.
But I think a better solution is to increase the Social Security taxable wage base.
What about the tax base?
Today, a worker who earns $50,000 per year pays $3,100 in Social Security taxes per year, or a 6.2% rate on all earnings.
Because of the $176,100 cap on the amount of earnings taxed, someone who earns $300,000 pays just 3.4% of gross earnings, or $10,918, into Social Security.
Eliminating the $176,100 cap on the amount of earnings taxed would make Social Security more sustainable and more fair, shoring up the system for your hard-working clients.
Lina Storm, CLU, ChFC, is executive vice president and head of advanced insurance solutions at Cetera Financial Group.
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