Social Security
The term “Social Security” is misleading, and even Congress has felt compelled to take steps to make the word “security” more concrete. Heated debate has surrounded the Social Security program, and questions concerning its solvency are likely to continue producing controversy. For those who will receive Social Security benefits in the near future, government tables list what the benefits will be. For those who are scheduled to retire over the next several decades, the computations will be, at best, guestimates.
One aspect that cannot be overlooked in discussing the problems besetting Social Security is the length of retirement. Life expectancy continues to increase. Government statistics show that the fastest-growing segment of the U. S. population, as a percentage, are those in their 80s. For those under age 60 in the year 2000, life expectancy will be over 100 years. Therefore, although no one knows their “expiration date,” most people can expect to spend a number of years in retirement.
Planning for this long span of time is a challenge for financial planners. It may also be a disheartening aspect of planning, because the increased life expectancy means that more current income is needed to fund future living expenses. For example, several years ago, the Social Security Administration indicated that retired workers received only an average of 13 checks before they died. As previously stated, this has changed. Now clients must be made aware that funding for longer life expectancies will require more of their money.
Most clients, assuming they are not the beneficiaries of a large endowment or trust fund, cannot rely on one source of income during retirement. For the majority, covering living expenses during retirement will require several sources of income, including retirement pensions, individual retirement accounts, Social Security, and investments. If clients are depending on Social Security to provide the lion’s share of retirement income in the future, they may be sadly disappointed. Those near retirement are relatively assured of a certain amount; this is not the case for those with many years to retirement.
Regardless of when a client will retire, the financial planner must assess projected Social Security benefits. First, it is important to look at the cost of contributing to the system. Amendments to the Social Security Act in 1983 were designed to correct projected future deficits by advancing increases in Social Security taxes and reducing or taxing some benefits. Social Security taxes cover Old-Age, Survivors, and Disability Insurance (OASDI) and hospitalization benefits.
The wage base has increased, and now for many individuals, Social Security taxes may be higher than their regular taxes. Clients must be prepared for this new, increased outflow. Therefore, any cash flow projections will have to take this factor into consideration.
Self-employed individuals are entitled to a credit against the self-employment tax of 2.3 percent in 1985, and a credit of 2 percent against the self-employment tax in 1986-89. Beginning in 1990, a new system for taxing the self-employed will eliminate some of the disparities between the self-employed and employees. It is noteworthy that the wage base for determining Social Security taxes must include deferred compensation contributions, such as 401(k) programs. It is especially apparent that the self-employed may well pay more in Social Security taxes than in income taxes.
The 1983 Social Security amendments made several other changes. Notable among these are:
• Automatic cost-of-living increases would be limited if fund balances fall below certain levels.
• Social Security recepients under the age of 70 who work are subject to a $1 reduction in benefits for every $2 of earnings when their earnings exceed a base amount. The base amount for 65 year olds was $6,960 in 1984 and will be adjusted under the terms of earlier legislation. Beginning in 1990, the $1 reduction will apply for every $3 of earnings over the base amount.
• More taxpayers will be subject to Social Security taxes, including such previously exempt groups as federal employees (hired on or after January 1, 1984) and employees of nonprofit organizations.
• The normal retirement age has been increased via phasedin extensions for workers who will reach age 65 after the year 2002. For those born after 1937, the age will gradually rise in two-month increments to a maximum age of 66 for those born between 1943 and 1954. The increase will continue to rise to age 67 for those born in 1960 and later.
One of the most controversial aspects of the Social Security amendment is the taxation of benefits. A maximum of 50 percent of Social Security benefits can be included as taxable income. Beginning in 1984, the taxable amount of Social Security benefits is the lesser of:
• One half of the Social Security benefits, or
• One half of the excess amount of the taxpayer’s modified adjusted gross income plus one half of Social Security benefits, minus the appropriate base exclusion.
Modified adjusted gross income is adjusted gross income plus any tax-exempt income, so that income from all sources, except Social Security, is included. The base amount is:
$32,000 for a married couple filing jointly.
$0 for a married couple filing separately who do not live apart for the entire year.
• $25,000 for all other taxpayers.
