How Social Security Can be Saved

This is, of course, one of the most volatile questions on the political landscape these days.  We have some constituencies claiming that the whole social security plan is a Ponzi scheme and we should get rid of it altogether – and many others aiming to make radical tax increases in the system to improve solvency, or pushing back the age(s) for receiving benefits to reduce drag on the system.

True, the system is in dire straits – not bankrupt, but needing attention.  Current projections indicate that at current pace, funds allocated to the system will run out sometime around 2036 unless something changes.

Increasing taxes is never popular, and current political winds have shown just how far the dream of no increases in taxes will be pushed.  In addition, extending the age limits during a time when unemployment is at record highs only exacerbates that issue – with older workers hanging on longer, younger workers can’t fill those jobs.

And eliminating the system altogether just isn’t workable.  Roughly 55 million Americans are currently receiving benefits – many with little else to live on in retirement.  A great many more are coming on the rolls every day, as the Baby-Boom generation hits the magic age(s).

Privatization, although once very popular, has lost its luster in recent years due to the market’s fluctuations.  The fact is that the majority of folks are just not very good at managing their own money – and the stakes are too high to give them a shot at what could be their only sustenance in retirement.  401(k) plans are great, but the facts are scary:  the Employee Benefit Research Institute’s (EBRI) March 2011 report showed that nearly half (46%) of all surveyed Americans who have saved anything at all have less than $10,000 saved (not including homes or defined benefit pension plans).  What’s worse is that over a third (36%) of those surveyed figured that if they saved up $250,000, that should be enough to retire comfortably, when in actuality that figure might cover the individual’s healthcare needs only.  And further, EBRI has indicated in countless reports year after year that when a 401(k) plan is in place, the actual returns achieved are dismal compared to the market average, due mostly to reactionary moves by investors operating without proper guidance.

So what can be done?

  Means testing, for one thing.  Donald Trump doesn’t need Social Security, and neither do his young children – but they’re eligible (and are likely receiving it).  That’s not to say that eliminating the Donald and his peers from the recipient rolls will balance out the system; many more Americans will likely have to forego at least a part of the benefit that they’ve been expecting.

We’ve had a form of means testing in place since 1983 – via the taxability of Social Security benefits.  And since the limits haven’t been adjusted since that legislation was put into place (actually since the 1993 legislation), this means test is becoming more and more “taxing” to folks with any additional income on top of Social Security every year.  But it probably doesn’t go far enough.

Another item that could be dealt with is the payroll tax ceiling – currently at $106,800 – that could be liberalized a bit without too much ruckus.  Granted, this does mean a new, or rather increased, tax, but when you weigh that against the alternatives, it’s not a bad option to consider.

All in all, the Social Security system has its problems, to be sure. It is, after all, a form of social insurance – meaning that some folks will get far less from the system than they put into it, and others will get far more from it than they put in.  But we’ve got it in place and it’s working (pretty well anyway), so we just need to make some adjustments to make sure that the system can make it through the rough patches.

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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