Many of the changes that get tossed around to address the Social Security trust fund shortfall are “political hot buttons,” according to Chad Parks, founder and CEO of Ubiquity Retirement, but he believes there’s one fix that could be made right away that would be more palatable to most Americans.
“One solution that could happen right now, which is really easy — don’t make any other changes except raise the tax by 2.4%,” Parks said. “That’s 1.2% to the individual, and 1.2% to the company.”
Even if lawmakers maintained the 2020 $137,700 cap on income ($142,800 in 2021) that is taxed for Social Security, Parks said the change would create surplus in the trust fund.
President-elect Joe Biden’s plan for addressing Social Security would increase payouts for people at lower benefit levels, and reinstate the payroll tax on people earning over $400,000.
“It’s a small group of people who would be affected, but it generates enough revenue to pay for his increase in payouts,” Parks said. The problem with Biden’s proposal, Parks said, is that it doesn’t address the surplus issue.
“It still doesn’t address when the surplus might be depleted, and we might have to have another reduction in benefits payouts.”
The Biden team’s success will depend on what happens in Georgia in January, Parks said. “If Republicans remain in charge of the Senate, I’m going to say that it’s going to be a battle,” he noted. “We’re not going to see meaningful changes to Social Security.”
Ubiquity’s stance is that “if you’re going to make changes, … go ahead and fix it once and for all.”
Three-Legged Stool
The metaphor of the three-legged stool has been bandied about in the industry for years, but Parks said that baby boomers are really the only generation to which it applies.
Related: Nine 401k Mistakes Many Boomers Make
“Some of them have been lucky to have pensions, they definitely are counting on their social security, and they do have personal savings,” he said. The Greatest Generation didn’t have 401ks, Millennials and Gen Xers don’t usually have pensions, and Gen Z is facing a potential future without Social Security, he noted.
“One of the challenges we have as a society is that Social Security was never meant to be a primary source of retirement [income], especially for a long period of time, especially for so many people. When it was put in place in the ’30s, it was meant to be a backstop, a supplementary safety net for people who were disabled, orphans and widows,” he said.
Longer life spans have added to the number of people drawing from Social Security and the number of years that they do so, he added.
“The modern retirement system we have in America is big experiment. It has yet to be proven or disproven, and I don’t know that it ever will, because it constantly changes and evolves with every generation,” he said.
The lesson for advisors is to have a contingency plan that supports clients’ financial success whatever happens to Social Security.
“If I’m an advisor, I really do owe it to myself and my clients to have a very thorough understanding of the state of Social Security,” he said. He recommends advisors be as conservative as possible when factoring Social Security benefits into clients’ plans.
“When you’re making your plans, already deduct 25% off the top. Just assume that’s going to happen because then if it doesn’t, then people are better off. But if you plan on a higher number, and it does go down, then you did your clients a disservice.”
Related:
- Social Security 2021: What Will and What Might Happen
- Americans Pessimistic About Congress’ Urgency to ‘Fix’ Social Security
- Most People Claim Social Security at Age…
Danielle Andrus works as an editor for The Financial Planning Association® (FPA®). Over the past 15 years, she has worked in various capacities, including writing and editing. Andrus has worked for several notable publications and outlets and spent more than seven years as the executive managing editor at ALM Media, publisher of Investment Advisor magazine and ThinkAdvisor.com. Before that, she was online editor for Summit Professional Networks, where she oversaw newsletter development for four magazines, including Benefits Selling, Senior Market Advisor, Boomer Market Advisor, and Bank Advisor.
