The Day is Fast Approaching When Congress Will Be Forced to Take Action to Shore Up Social Security

  • The Board of Trustees for Social Security recently issued its annual report. This report states the trust fund for Social Security Old Age, Survivors and Disability Insurance (OASDI) will be depleted by 2033. This is a year earlier than projected last year.

  • The primary challenge for Social Security is an aging population due to low birth rates. The number of Social Security retirees is growing faster than the number of covered workers. As a result, since 2008, the cost of benefits has been growing faster than the income generated by payroll taxes. This trend is expected to continue through 2040 and will result in the depletion of Trust Fund assets. It is estimated that when the Trust Fund is depleted there will be sufficient income going forward to pay approximately 76 percent of scheduled benefits.

  • The idea of the Social Security Trust Fund going “broke” is somewhat of a misnomer as the income generated by payroll taxes has always been spent immediately. Trust assets consist entirely of US Treasuries. However, depletion of the Trust Fund is significant as Congressional action will be necessary in order for Social Security to continue to pay all scheduled benefits.

  • The choices facing Congress are clear – either cut benefits or increase the payroll taxes. Obviously, neither option is attractive.

  • The longer Congress puts off making a decision, the tougher the choices will be. The Board of Trustees estimates that an immediate increase in rate of the payroll tax of 3.6 percent is necessary to keep the system solvent.

  • Increasing the payroll tax is problematic as this tax is already high. Currently, about 70 percent of Americans pay more in payroll taxes that federal income taxes. The OASDI tax rate is now 12.4 percent split evenly between employers and employees. This tax is unlike the income tax in that it is capped at the first $140,800 of income; it is a flat rate; there are no deductions or exemptions; and employees must pay income taxes on their contributions. When the Medicare tax, which has no cap, is included the total payroll tax rises to 15.3 percent.

  • Proposals have been introduced in Congress that would raise the payroll taxes only for high earners. The Biden campaign platform included a proposal to increase the payroll tax on income in excess of $400,000. Social Security has always been viewed as a public pension system because benefits are based on the amount individuals pay into the system. The argument in favor of this proposal, of this course, is that the wealthy should pay more. The argument against is that this is a fundamental change. Raising the payroll tax only for some, means Social Security starts to look more like a welfare program, rather than a retirement system. This may erode political support over time.

  • Cutting benefits is also problematic as they are modest. The average monthly benefit paid by Social Security is about $1,500. For many recipients Social Security is their primary source of income. It is estimated that for one third of recipients, Social Security is their only source of income.

  • Several proposals have been introduced in Congress which would phase out benefits for high earners at a certain income level. Such proposals are problematic for the same reason as different tax rates because Social Security again starts to look less like a retirement system and more like a welfare program.

For any further questions, please do not hesitate to email Wellspring Financial Partners at info@wellspringfp.com or call 1 (844) 203-2402.

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