I am regularly asked by folks how I feel about the future state of Social Security. Given that it is an integral part of just about everyone’s retirement income plan and the uncertainty surrounding its funding (or lack thereof), this question never surprises me. The answer to this question is particularly important for those approaching retirement within the next 5-10 years, because time is simply not on their side if their anticipated benefits are cut. Many folks within this demographic are counting on this money to help support the retirement they’ve worked for all their lives, and rightfully so.
Unfortunately, I can’t predict where the whims of these Washington Wizards in Congress will take us on this crucial issue. But . . . I do have some thoughts on it. Get this, just this past week house lawmakers held a hearing to consider a new Social Security proposal. On Tuesday, December 7, the House Ways and Means Social Security Subcommittee held a hearing to consider a proposal titled Social Security 2100: A Sacred Trust. The hearing marked the eighth Capitol Hill session on the issue since 2019.
You see, the bill currently has 195 co-sponsors, all of whom are Democrats. And while Republicans are skeptical of the plan, Democrats are hoping for a vote on it this spring. While Democrats have extremely slim majorities in the House and the Senate, they don’t seem to be giving up the idea of major legislation. Besides having the support from nearly all of the 221 Democratic members of the House, more than 140 organizations have lined up behind the Social Security 2100 Act, according to Rep. John Larson, a Democrat from Connecticut who is the chair of the subcommittee.
However, the bill doesn’t necessarily have the Republican support it needs. Ranking member Tom Reed of New York and other Republicans criticized the bill as too costly, and insufficient for ensuring long-term solvency. Reed believes that the legislation doesn’t currently have enough votes to pass the House or the Senate, arguing that Democrats would be moving the bills forward if they had enough votes to do so.
So just what are the Democrats proposing? Well, their bill proposes to address the Trust fund shortfall by including a host of provisions aimed at increasing benefits while adding more revenue through additional taxes. Interestingly, the bill does not include raising the retirement age, which many of its advocates oppose. It would provide a benefit increase for new and current beneficiaries amounting to about 2% of the average benefit.
The bill aims to establish the minimum benefit at 125% above the poverty line, as well as boost benefits for certain widows and widowers and provide credits to caregivers who take time out of the workforce. In addition, it proposes to raise the benefit age for students up through age 25 and end the five-month waiting period for disability benefits. It would change the way cost-of-living adjustments for beneficiaries are calculated each year – which could have a significant impact, as the current COLA formula calculates the CPI-W, which has long been decried as irrelevant to the actual spending needs of seniors.
Naturally, any changes to the program come at a cost. To pay for these changes, the legislation calls for increasing Social Security taxes paid by higher-wage earners. In 2021, those taxes are capped at $142,800 in wages, and in 2022 that will rise to $147,000. This proposal reapplies taxes on wages at $400,000 and up₁.
Unfortunately, however, the bill would create only about half the revenue of the previous Social Security 2100 Act proposal put forward in 2019. And notably, the benefit enhancements would only be in place for five years. At the hearing, opponents of the bill pointed out that studies have found that the legislation would only push back the insolvency date of the program’s trust fund until 2038. On this point, Reed argued that temporary hikes in benefits in the bill would raise its cost over time if made permanent and that the higher rates for the top-earning workers would only leave cuts or taxes on middle-class employees on the table in the future.
Like others, I too wonder what the future holds for Social Security and its place in our retirement plans. Mitch McConnell, Senate Minority Leader, once said, “More young people believe they’ll see a UFO than they’ll see their own Social Security benefits.”
I’m not quite as skeptical. I believe that the system is too important for so many Americans and we will see changes made to help sustain it, in some form or another. I prefer to agree more with Dwight D. Eisenhower, who said, “Should any political party attempt to abolish social security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear of that party again in our political history.”
And this week’s comments by New York member Tom Reed seem to echo this sentiment. “We share the same goal — ensuring that those who have paid into these important programs have security against disability and old age,” Reed said. “So, while I cannot support this bill, I am happy to work with Chairman Larson to get some real, permanent, targeted reforms enacted into law.”
For now, we have to live with the uncertainty while being cautiously optimistic. But we need to also make a plan B, a “just in case” plan for the possible scenario that we find ourselves receiving less than we anticipated. As we are approaching the New Year, now would be a good time to stress test your retirement system so you understand exactly how a benefit cut would impact you.
Folks, this Social Security uncertainty is all the more reason to look at your investment system especially if you need income from investments. Incorporate downside risk mitigation opportunities to help preserve capital and provide steady income. You can then re-visit your income sources to see if you can make changes to reduce your reliance on these funds.
And as always – be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield, MA. Insurance offered through its affiliate, CutterInsure, Inc. We do not offer tax or legal advice. Jeff can be reached at email@example.com.