With Secretary Geithner back in the news last week pressing Congress to take action on the growing concerns with Social Security, it’s likely we’ll soon see Congress return to the slew of proposals presented over the last few months.
In this world of non-stop information, it’s tough to discern between news and opinion, truth and fiction and everything in between. Many of our clients have asked for a basic breakdown of the primary issues and proposals floating around Capitol Hill and how it directly impacts them. A summary of some of the basics are below.
Increasing the retirement age
- An eventual increase in the retirement age for Social Security is likely to be a part of almost any proposal. This process is very likely to be gradual in nature, grandfathering anyone currently at or near retirement age. For those readers still in their working years, there’s potential for a wide range of impact based on what age is agreed to and when it goes into effect.
- Since its inception in 1935, Social Security has always been paid based on an individual’s wages regardless of their other wealth or non-wage based income. The system’s current situation has shifted talk to proposals that could include means testing. Means testing refers to reducing or eliminating benefits based on a pre-determined formula for wealthier and/or higher income participants. This formula gets a little tricky depending on who gets their way in Washington based on a wide range of testing factors, such as…
* Income testing that may or may not include investment income or income from a business
* Asset-based testing that could be based on all assets a participant holds, or allow for
omission of certain assets like residences or automobiles
* The tests could be assessed all at once when an individual’s benefits begin or over regular
* The tests could either gradually phase out benefits, eliminate them altogether or a combination
- It’s important to note that there does seem to be some growing support in Washington that, if means testing is determined to be necessary, that it be done against career earnings as opposed to retirement assets.
- Long story short, it’s still far too early to determine what the impact of means testing on a given individual could be, but it is an important piece of the puzzle to understand.
Where things stand
- There are multiple budget plans out there right now that all treat Social Security a little differently. It’s unlikely that any of these plans pass as-is, but much like means testing, it’s important to understand what is included in each at a basic level to understand how it might impact you.
* The Simpson/Bowles Deficit Commission
– This group recommends starting some loosely defined form of means testing in 2050 for middle
and upper income earners.
* Paul Ryan’s “Roadmap” Budget Plan
– This plan suggests preserving the current Social Security system as-is for all people age 55 or
older and doesn’t get into great detail as to what other action should be taken to help keep the
program solvent for those under 55.
* Lindsey Graham’s Social Security Solvency & Sustainability Act
– This plan suggests raising the retirement age to 70 by 2032 and starting means-testing for new
retirees in 2018, with benefits beginning to tier down for retirees with income starting at
$43,000. Anyone currently age 56 or older would maintain under the current rules.
Hopefully this summary has at least given you some idea of the issues at hand. Obviously, a lot is still up in the air, but it will be important to separate the details from the rhetoric as this issue starts to be bantered about again. It is an issue that, one way or another, will impact all of us.
Chip Workman, CFP®