Is Social Security Going Bankrupt?

Corey is SSN’s in-house consultant on tax planning. He shows advisors how to dig into complex strategies and consider the implications of taxes as clients are getting ready to retire.

You are likely dealing with prospects and clients regularly who believe Social Security is going to run out of money. Unfortunately, your clients may end up making rash decisions that can affect them for the rest of their lives.

We do know the Social Security Trust Fund is projected to run through its $2.8 Trillion surplus by 2034, but that does not mean it is going away. In fact, this is not the first time Social Security has had funding problems. From 1975-1981 the Social Security Trust Fund ran a deficit which was ultimately patched through legislation.

With that said, I want to look at one proposal and the potential implications to our future planning:

Currently only the first $132,900 of wages are considered taxable for Social Security. Employers and employees each pay 6.2% of these wages for a total of 12.4%. The wage cap is set up to increase by the Consumer Price Index (CPI-W) over time.

Even with this substantial amount of money being paid into the system, we are still likely going to deplete the Social Security Trust Fund because we have so many baby boomers near retirement, and people are living much longer than they used to.

One of the proposals on the table now are to increase Social Security taxable wage cap so that higher earners pay more into Social Security during their working years. Social Security estimates that 20% of workers will earn more than this wage cap for at least one year during their career.

Here are a few examples of how this proposal may play out:

  1. Eliminate the wage cap altogether: All wages would become taxable at the current 6.2%/12.4% rates.
  2. Raise the wage cap above where it is today: This could mean that all wages up to such as $250k would be taxed with future inflation adjustments still factored in.
  3. Raise or eliminate the wage cap but at a lower rate. This would be like the first two options but with a rate lower than the 6.2%/12.4% tax rates.

All these proposals may also come with higher Social Security benefits in return for the higher taxes.

Ultimately, this is just one proposal out of many that might not get addressed until the early 2030’s after years of running a deficit, but it is worth examining since this topic is typically on the minds of your clients.

The takeaways here are very important:

  1. There are many ways to shore up Social Security that will not require benefits being eliminated or even drastically cut.
  2. This conversation is likely to gather steam as we begin seeing the Social Security Trust Fund being depleted, so you will need to have a good understanding of how this works and the implications to your clients.
  3. It is prudent to plan for higher taxes in the future, so we should be using the low tax environment now and encourage clients to take advantage of it.

Stay tuned for more blog posts and other great Tax Savvy Content.

https://www.ssa.gov/oact/STATS/table4a3.html

https://fas.org/sgp/crs/misc/RL32896.pdf

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