I figured that I would talk about this topic again since it seems that Congress is considering doing something to try and fix social security.
I was perusing the 2022 Annual Report issued by the Social Security Board of Trustees recently and found some good news and some not-so-good news. First, let’s look at a few highlights from the report.
Here are some interesting facts that they talked about in the report:
- There are actually 2 trust funds: Old Age and Survivors Insurance (OASI) fund and the Disability Income (DI) fund. However, everyone usually describes it as one fund (OASDI).
- Federal Insurance Contributions Act (FICA) taxes are the primary source of revenues for OASDI and are the largest component of taxes that are commonly referred to as payroll taxes.
- Employers and employees each pay 7.65 percent of wages in FICA taxes; the portion dedicated to Social Security is 6.2 percent. The other 1.45 percent is dedicated to Medicare’s Hospital Insurance program and is not subject to an earnings cap.
- Self-employed individuals also contribute to those funds through Self-Employment Contributions Act (SECA) taxes. The rates for SECA taxes are identical to those for FICA taxes, with the only difference being that the individual is responsible for paying both the employee and employer portions of the tax.
- The OASDI trust fund will be depleted by 2035. That means benefits after 2035 can be paid by new money coming in only.
- After 2035, new money coming in via OASDI taxes will be sufficient to pay about 80% of benefits.
- Currently, earnings up to $160,200 are taxed for Social Security benefits.
So, the good news is that there is that there is still a little cushion in the trusts. If the government takes action now, it will be a lot less painful than if we wait until it’s all gone. However, you know they won’t act unless their jobs depended on it so we have to hold our members of Congress accountable.
I don’t like whining about a problem unless I have a decent solution to fix it. In the case of running out of money to fully fund social security, there’s a couple of solutions that can help:
- Raise or remove the income cap, currently $160,200, that is subject to OASDI payroll tax. There is even talk about keeping the cap where it is and then restarting OASDI payroll deductions at a higher income, say $500,000. This would give people making between 160k and 500k a little break. Either way, it would certainly bring in the kind of revenue needed to shore up the program’s balance sheet.
- Another solution is means testing. This means that people who have an income over a certain level would be phased out of getting any benefits. People like Warren Buffet, Bill Gates, and the Walton family can probably get by without their social security check every month.
Using some variations of these 2 solutions could keep the OASDI trusts from drying up and will help the people that truly rely on their social security check to live, which is more people than you can imagine.
Please comment or send an email if you have any questions. Thanks!
Joe Baker, CFP®
Baker Asset Management, LLC
