Funding Alternatives to an Exhausted Trust Fund

Posted by CopyTeam

 

As the Social Security Trust Fund approaches its expiration date, many existing entities are offering helpful suggestions for funding alternatives. For example, the Association of Mature American Citizens (AMAC) recommends a combination of changing how cost of living adjustments are made, delaying retirement age and updating the delayed credit strategy. Among its proposals, the AMAC also advocates establishing a new “Social Security Plus” account — a personal retirement savings account that begins paying out at age 62. Specifically, this account would:1

 

  • Be funded on a strictly voluntary basis by both employees and employers
  • Be owned by the individual
  • Provide a tax deduction for employer contributions
  • Allow after-tax contributions by employees with tax-free withdrawals (similar to a Roth IRA)
  • Be funded via payroll deduction

 

Alicia Munnell, director of the Center for Retirement Research at Boston College and a respected individual in the retirement income field, advocates a long-term approach to solving the pending Social Security shortfall. While she does not advocate cutting benefits, Munnell believes that the only way to fund full benefits for the next 75 years is to raise current payroll taxes.2

 

Those who have already retired are less likely to be affected by changes to the Social Security system than those who are currently preparing for retirement. It’s important to have your own plan for an independent retirement income stream, separate from government benefits, to ensure your needs will be covered. Feel free to reach out to learn more about current income vehicles that can help secure your financial future.

 

In a recent proposal for funding Social Security, President Biden proposed:

 

  • Raising the guaranteed minimum benefit to 125% of the federal poverty level
  • A 5% increase for retirees who have been drawing benefits for at least 20 years
  • Enhancing payouts to surviving spouses by 20%
  • Boosting the annual cost-of-living adjustment for benefits

 

Biden proposes paying for benefit increases by levying FICA taxes on workers who earn more than $400,000 a year. Other proposed ideas include imposing FICA taxes on income above $142,800 (which is currently the limit for this tax), gradually increasing the payroll tax rate from the current 12.4% to 14.8%, reducing benefits for those with higher lifetime incomes, reducing cost-of-living adjustments, and limiting benefits for spouses and children of higher-income earners.3

 

Those are all proposals that, in some form, may likely change the future Social Security landscape. Those nearing retirement can utilize a couple of strategies now that may not be as lucrative once proposed changes are made.

 

One option is the delayed credit that accrues if you wait until age 70 to draw benefits. Now that people are living longer, this accrual strategy, which was implemented by the Social Security Administration back in the 1950s, produces a substantially higher advantage for retirees who delay drawing benefits and then live to a ripe old age. In fact, waiting until age 70 can make lifetime benefits worth 76% more than claiming them at age 62. This actuarially enhanced perk is available only until benefits are adjusted to match to today’s longer life expectancy.4

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Also be aware that widows and widowers do not necessarily have to wait until age 62 to begin taking Social Security benefits based on the earnings of an eligible spouse who passed away. A surviving spouse can begin drawing the deceased spouse’s benefit at age 60, then switch to his or her own benefit later (if higher). They can even wait until age 70 for the delayed credit and begin taking the enhanced benefit at that point.5

 

 

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1 Association of Mature American Citizens. 2021. “The Combined Social Security Guarantee and Social Security Plus Initiative.” https://amac.us/social-security/. Accessed March 30, 2021.
2 Jane Wollman Rusoff. ThinkAdvisor. March 14, 2021. “Alicia Munnell: Biden’s Social Security Tax Hike Plan Falls Short.” https://www.thinkadvisor.com/2021/03/19/alicia-munnell-bidens-social-security-plan-falls-short/. Accessed March 30, 2021.
3 Bob Carlson. Forbes. Feb. 22, 2021. “Changes Must Come To Social Security.” https://www.forbes.com/sites/bobcarlson/2021/02/22/changes-must-come-to-social-security/?sh=50094aa115e4. Accessed March 30, 2021.
4 Investopedia. Dec. 21, 2020. “How Much Can I Receive From My Social Security Retirement Benefit?” https://www.investopedia.com/ask/answers/102814/what-maximum-i-can-receive-my-social-security-retirement-benefit.asp. Accessed April 14, 2021.
5 Social Security Administration. 2021. “Receiving Survivors Benefits Early.” https://www.ssa.gov/benefits/survivors/survivorchartred.html. Accessed March 30, 2021.
Content prepared by Kara Stefan Communications.
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