Although it was a largely overlooked issue during the 2016 elections, President-elect Donald Trump was pretty clear during his campaign that he planned to leave Social Security alone.
Trump's belief is that America has a pledge to honor in paying retired workers, and it would continue to honor that pledge for years and generations to come. Rather than adjusting specific components of Social Security, Trump aims to grow the economy at a faster pace through a mix of individual and corporate tax cuts, renegotiated trade deals, and domestic infrastructure spending. The idea is that if the U.S. economy is growing faster, workers will be generating more income, yielding higher payroll tax revenue collection, and buoying the program.
The big hoopla over the future of Social Security is that if nothing is done to boost revenue, cut benefits, or enact some combination of the two, the Social Security Board of Trustees has forecast that the program will have exhausted its more than $2.8 trillion in spare cash by the year 2034. Should this happen, across-the-board benefit cuts of up to 21% may be needed to sustain payouts through 2090. Thus, Trump's hands-off proposal on Social Security, while not a defining fix, gave solace to some retirees and pre-retirees that -- for now at least -- their benefits wouldn't be altered.
Surprise! Republicans introduced a bill to drastically change Social Security
However, not all Republicans see eye-to-eye with President-elect Trump, and as I surmised a few weeks prior, it could mean the possibility of Trump's having to compromise on his pledge not to alter Social Security. Perhaps the biggest test comes from Rep. Sam Johnson (R-Tx.), the chairman of the Ways and Means Social Security subcommittee. On Dec. 8, Johnson unveiled his "plan to permanently save Social Security."
The 54-page bill, known as the Social Security Reform Act of 2016, covers a number of critical topics, most of which would revolve around reducing the rate at which benefits grow. Let's take a quick look at the key points of this Republican Social Security bill.
For starters, Johnson's legislation would increase the full retirement age from 67, which is the current expectation of people born in 1960 and after, to 69 years of age by 2030.
It would reduce cost-of-living adjustments (COLAs) for higher-earning individuals, while at the same time increasing benefits at a faster pace for lower-income retirees. In particular, individuals earning in excess of $85,000 and couples with more than $170,000 in earnings would have their COLAs completely cut out beginning in December 2018. The chained Consumer Price Index (CPI) would be used to calculate COLA increases for all other workers instead of the currently used CPI for Urban Wage Earners and Clerical Workers (CPI-W).
Johnson's legislation would begin phasing out the taxation of Social Security benefits beginning in 2045 and ending by 2054. Currently, Social Security taxes a percentage of benefits if an individual earns more than $25,000 annually, or a couple earns more than $32,000. By 2053, the phased taxable limits would rise to $92,500 for an individual and $185,000 for couples. By 2054, this tax would be eliminated in its entirety.
The bill would place a cap on the benefit amount for spouses and children of higher-earning retired and disabled individuals.
It would eliminate the retirement earnings test, which applies only to people receiving benefits before hitting their full retirement age (FRA). In 2017, the Social Security Administration can withhold $1 in benefits for every $2 in wages earned above $16,920, and $1 in benefits for every $3 in wages earned above $44,880 if you'll hit your FRA in 2017 and are already receiving benefits. The earnings test would disappear by 2023, giving elderly working Americans the ability to double-dip with their wages and Social Security benefits.
Finally, Johnson's legislation would raise the minimum benefit available to people who worked throughout their lifetime but failed to earn a lot.
Everything you need to know about Social Security:
25 Social Security facts & figures you need to see
25 Social Security facts & figures you need to see
1. 60.66 million
As of the September 2016 snapshot from the Social Security Administration (SSA), 60.66 million people were receiving monthly benefits, two-thirds of whom are retired workers. A little more than 6 million survivors of deceased workers and 10.6 million disabled persons were also receiving monthly benefits.
(Caroline Purser via Getty Images)
2. 5.44 million
Social Security's beneficiary base is increasing rapidly due to the ongoing retirement of baby boomers, which is expected to last until about 2030. As such, 5.44 million people were newly awarded Social Security benefits in 2015.
(ImagesBazaar via Getty Images)
It's important to understand that Social Security isn't an entitlement, though the requirements for a guaranteed benefit are not too high. You need 40 lifetime work credits to qualify for Social Security benefits, and a maximum of four credits can be earned annually. In 2017, one work credit is equal to $1,300 in wages. Simply earn $5,200 in 2017 and you'll have maxed out your work credits for the year. Do that 10 times and you'll be guaranteed benefits when you retire.
Based on statistics from the SSA, nearly all working Americans (96%) are covered by survivors insurance protection. Though Social Security is primarily designed to provide financial protection for retired workers, it does provide benefits for the spouses, children, and in rarer cases parents of deceased workers.
To add to the above statistic, the SSA also points out that 90% of the American workforce is covered in case of long-term disability. Since nearly 70% of all private sector workers have no long-term disability insurance, it's good knowing that Social Security has their back.
An interesting figure from the SSA is that 55% of beneficiaries are women. Social Security income is of particular importance to women since 1) they tend to live about five years longer than men, on average, and 2) they're often the caregivers that take care of the kids or sick family members, thus their lifetime earnings are often lower than their male counterparts'. Social Security income can be critical to ensuring a healthy financial foundation for women come retirement.
According to an analysis conducted by the Center on Budget and Policy Priorities (CBPP), Social Security income has reduced what would be a 40.5% poverty rate for seniors without this added income to just 8.5%. While the CBPP's analysis can't factor in external variables such as how much extra seniors would have saved prior to retiring if Social Security wasn't available, it's clear as day that Social Security is critical to keeping seniors on solid financial footing.
Based on data from the SSA, 81% of all benefits paid out by the Old-Age, Survivors, and Disability Insurance Trust (OASDI) are heading to seniors ages 62 and up. Just 5% go to children under the age of 18, and another 14% to adults between the ages of 18 and 61.
Statistics from the SSA in 2016 show that 61% of seniors rely on Social Security to provide at least half of their monthly income. For elderly couples this figure was 48%, while 71% of unmarried elderly persons lean heavily on the program for at least half of their monthly income.
10. $920.2 billion
The SSA's data showed that $920.2 billion was collected from three revenue channels in 2015. A majority of this revenue came from payroll taxes (86.4%), while interest earned on the OASDI's spare cash (10.1%) and the taxation of benefits (3.4%) comprised the remainder.
Payroll taxes comprise the lion's share of revenue collection for Social Security. This tax totals 12.4% of wages (up to a certain point, which is discussed below) and it's typically split down the middle between you and your employer, with each paying 6.2%. If you happen to be self-employed, you're on the line for the entire 12.4% tax.
There is, however, a cap on how much a person can be taxed by the SSA via the payroll tax. All earned income in 2017 between $1 and $127,200 is subject to the 12.4% payroll tax. Any wages beyond that point are free and clear of being taxed by the SSA.
The September 2016 snapshot shows that the average retired worker is bringing home $1,351.70 per month, or $16,220 over the course of a year. Annual benefit increases are tied to the inflation rate as measured by the Consumer Price Index for Urban Wage Earners and Clericals Workers, or the CPI-W.
Speaking of inflation, Social Security beneficiaries are getting a 0.3% cost-of-living adjustment (COLA) in 2017, the smallest increase on record. Social Security's COLA has been dragged down in recent years by weaker energy and food costs, which are sizable components of the CPI-W.
15. 33 out of 35 years
One of the more saddening facts and figures about Social Security is that its COLA has been lower than medical cost inflation in 33 of the past 35 years. The CPI-W factors in a number of varied expenses, but medical costs are a much smaller portion of workers' average expenditures. Seniors spend double what urban wage earners and clerical workers do on medical costs as a percentage of their annual expenditures.
Social Security benefits are capped at $2,687 per month, which makes sense given that payroll taxes have an annual cap as well. The monthly benefit cap is usually adjusted year-to-year based on inflation. Only a small fraction of Americans have a shot at reaching this maximum payout, as you'll see in the next figure.
Based on data from 2013, as assembled by the Centers for Retirement Research at Boston College, 60% of retirees sign up for benefits before reaching their full retirement age (FRA). A person's FRA is when they become eligible to receive 100% of their FRA benefit. By signing up early, retirees are taking a cut in benefits from their FRA benefit of up to 25% to 30%.
As of 2015, the worker-to-beneficiary ratio stood at 2.8 workers for every one beneficiary. In about two decades, this ratio is forecast to drop to 2.1-to-1. In simpler terms, baby boomers are retiring in increasing numbers, and there simply aren't enough new workers to take their place and maintain the worker-to-beneficiary ratio at its current level. This leads to the next point...
20. The year 2020
Based on the latest report from the Social Security Board of Trustees, by 2020 the cash inflow into the OASDI is slated to turn into a cash outflow. In other words, what's expected to be close to $2.9 trillion in spare cash will begin dwindling in 2020.
21. The year 2034
Perhaps the scariest finding of the Trustees' report is that Social Security's spare cash is expected to be exhausted by the year 2034. Assuming Congress passes no new laws affecting Social Security, the Trustees predict that an across-the-board benefits cut of up to 21% may be needed to sustain payouts through the year 2090.
Findings from the Board of Trustees report also showed that the actuarial deficit in 2016 was 2.66% for the program. In easier-to-understand terms, a 2.66% increase to the payroll tax would be expected to alleviate all funding concerns through the year 2090. This would mean an increase to 7.53% if you're employed by someone else, or 15.06% if you're self-employed.
It's a fact that gets overlooked by many seniors, but Social Security income may be taxable. Individuals earning more than $25,000 annually and joint filers with income over $32,000 could have a percentage of their Social Security benefits taxed. Not to mention 13 states also tax Social Security benefits.
According to Gallup, 51% of polled Americans in 2015 believed Social Security won't be there for them when they retire. Luckily, this is blatantly false. Social Security is essentially incapable of going bankrupt because it'll always be collecting payroll tax revenue from the workforce. Benefits may indeed need to be cut, but the program will be there for many generations to come.
Finally, a survey conducted by MassMutual Financial Group in 2015 found that just 28% of the more than 1,500 respondents who took its quiz received a passing grade and correctly answered at least 7 out of 10 multiple choice or true/false questions. Only 1 respondent out of more than 1,500 got all 10 questions correct. It's a stark reminder of just how little Americans know about Social Security.
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Would the Social Security Reform Act of 2016 work?
The bill Sam Johnson introduced has some intriguing talking points that would address some long-standing problems with Social Security.
For example, raising the retirement age would indeed help account for what's been a pretty steady increase in average U.S. life expectancies over the past 50 years from about 70 years to nearly 79 years of age. Encouraging seniors to work longer (if they're healthy) will not only fill the payroll tax coffers a little longer, but it'll likely reduce the strain on the Social Security Trust by ensuring it pays out seniors for fewer years, since they'll probably be working longer.
This bill would also address the pesky taxation of benefits, which hasn't been adjusted since 1983. Initially, the taxation of benefits was only designed to affect about 1 in 10 households, but according to The Senior Citizens League in 2015, 56% of all seniors are paying some federal tax on their benefits. It would still be nearly 30 years before these taxes begin to adjust higher and phase out completely by 2054, but it would eventually mean more money in the pockets of most seniors come retirement.
There's also something to be said about capping COLAs for high-income individuals and couples. Even Donald Trump has opined in an off-the-cuff manner that high-income individuals who aren't going to be reliant on Social Security income should forgo receiving it. While Johnson's bill would still allow these high-income earners to receive their benefit, it would essentially be frozen in time, allowing for lower-income benefits to receive a much-needed boost.
However, Johnson's legislation isn't all cookies and cream. It has genuine flaws as well.
5 Social Security rules everyone should know:
5 Social Security rules you should know by heart
5 Social Security rules you should know by heart
1. It takes 10 years of work to earn the right to Social Security retirement benefits.
Eligibility for retirement benefits requires that you earn 40 work credits under the Social Security system. You can earn up to four credits per year, and for 2016, you'll get one credit for every $1,260 in earnings.
The rules for Social Security disability benefits are different and are based on the age at which you become disabled. In general, the earlier in your career you become disabled, the fewer work credits it takes to get disability benefits. However, it never takes more than the 40 credits needed for retirement benefits.
(Thomas Barwick via Getty Images)
2. Most spouses and some ex-spouses can file for spousal Social Security benefits.
In general, spouses of eligible workers are entitled to spousal Social Security benefits. If you've been married for a year or more, then you can qualify for spousal benefits. In addition, parents of minor children can claim spousal benefits on each other's work histories regardless of length of marriage.
For ex-spouses, the rules are different. Only if your marriage lasted 10 years or longer can you claim benefits on an ex-spouse's work history. In addition, if you've remarried, then you forfeit the right to claim spousal benefits.
(Jose Luis Pelaez via Getty Images)
3. Most people can apply for benefits at age 62.
The general rule for retirees is that the earliest age you can file for benefits is 62. But some people can apply earlier. Spouses can get spousal benefits regardless of age if they are caring for a child who receives benefits either because the child is under age 18, in high school and 19 or younger, or disabled. Widows and widowers can claim survivor benefits at age 60, with an option to claim as early as age 50 if the surviving spouse is disabled.
In general, you can only apply a few months in advance for benefits. The Social Security Administration won't accept applications more than four months before the date when you want benefits to start.
(ViewStock via Getty Images)
4. Social Security considers your best 35 years of work history.
In calculating benefits, Social Security looks at the entirety of your career, choosing the 35 highest-earning years after adjusting for inflation over the course of your work history. That means that in contrast to the way some public pensions work, earlier low-paying years can play an equally important role in determining your benefit as recent high-paying years.
For those who haven't worked a 35-year career, staying in a job longer can have a measurable impact on benefits. Even if you already have 35 years of work, staying in a high-paying job an extra year can replace an earlier low-earning year -- again depending on how inflation has behaved in the interim.
(Jupiterimages via Getty Images)
5. Social Security rules can change at a moment's notice.
Understanding Social Security is hard, but even worse is the fact that once you think you have a rule down cold, it can change. Americans found that out late last year, when new changes eliminated the file-and-suspend option and restricted application strategy for most future participants.
Because your benefits aren't written in stone, you need to stay aware of potential program changes. That way, you can weigh in with your representatives to ensure that any concerns you might have are heard.
Social Security rules can be hard to follow, but they're important to understand. By knowing these five rules, you can do a better job of managing your retirement finances.
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For example, it does little to address the disadvantage that roughly 60% of Americans who currently file for benefits before hitting their full retirement age would face by taking benefits early if the full retirement age is increased to 69 by 2030. Some retirees simply don't have a choice when it comes to taking benefits early. Be it poor health or their inability to find a job, filing for benefits at age 62 with an FRA of 69 could mean accepting a hefty lifelong reduction in benefits.
Second, the chained CPI may not be an appropriate answer to fixing how inflation factors into COLAs. Though proponents have suggested that the chained CPI would more accurately account for inflation, it tends to grow at a slower pace than the CPI-W -- and more important, it understates the inflationary impact of medical care and housing, which are already understated in the CPI-W. In other words, the chained CPI could cause seniors to fall even further behind the expense curve.
Also, completely eliminating the taxation of benefits by 2054 removes a source of revenue for a program that clearly needs more -- not less -- revenue. The thresholds for taxation should probably be amended for inflation since they haven't been touched since 1983, but some degree of taxation on upper-income earners is likely needed to provide extra revenue for the program.
More than likely, Johnson's Social Security Reform Act is a starting point for what's bound to be some intriguing discussions involving Social Security in the coming years and months. With Republicans sporting a clear-cut majority in the legislative branches of government, it's not out of the question that a Social Security reform bill could find its way to President Trump's desk once he takes office.
The 10 best places to retire with only a Social Security check
The 10 best places to retire with only a Social Security check
Idaho’s state capital has plenty of affordable housing, costing retirees with a paid-off home a median of just $351 per month. For that low housing cost, retirees have access to a variety of amenities and entertainment. Idaho residents age 60 or older can register for classes at Boise State University for the bargain rate of $5 per credit hour (plus a $20 registration fee per semester). Or you could relax and stroll through a museum or enjoy the outdoor scenery. Seniors also get discounts to the Boise Art Museum, Zoo Boise, Bogus Basin ski area and on some Boise State sporting events. Best of all, a walk or bike ride on the 25-mile greenbelt along the Boise River, which runs through the center of the city, is free for everyone.
Cape Coral, Florida
Waterfront property is a way of life in Cape Coral, which has over 400 miles of canals as well as access to the Gulf of Mexico and the Caloosahatchee River. You could easily spend your days boating, fishing or walking along the beach. But a house on or near the water won’t cost you a fortune. Median homeownership costs for people age 65 and older are $1,251 with a mortgage and $558 without one. The median rent is $983 per month. Many snowbird retirees reside in Cape Coral seasonally due to the pleasant winter weather. An added bonus: There’s no state income tax in Florida.
Colorado Springs, Colorado
The natural wonders will draw you into this Rocky Mountain city. Retirees can linger among the scenic beauty at Pikes Peak, Seven Falls and Garden of the Gods, or find a volunteer position or part-time job sharing these mountain views with tourists. Athletes from across the country come to Colorado Springs to train at the U.S. Olympic Complex, and seniors can visit the facility at a discounted rate. Retirees who have paid off their mortgages get to live in this high-elevation mountain town for the bargain price of $393 per month. Older homeowners with a mortgage ($1,221) and renters ($827) pay more.
When selecting a retirement spot, it’s important to make sure that doctors and hospitals will be there if you need them. Dayton’s largest employers are health care providers, and the city has several hospitals U.S. News has rated as high performing for specific procedures and conditions, including Miami Valley Hospital, Kettering Medical Center and Good Samaritan Hospital. But living near a variety of health care options doesn’t have to cost a lot, ranging from a median of $469 for retirees with a paid off house to $659 for renters and $1,080 monthly for seniors with a mortgage. Aviation buffs and air force retirees will enjoy the National Aviation Hall of Fame and the Dayton Aviation Heritage National Historical Park. The famous Wright brothers were Dayton natives.
Grand Rapids, Michigan
Grand Rapids is known for its impressive arts scene, which includes Frederik Meijer Gardens & Sculpture Park, the Grand Rapids Art Museum and the Urban Institute for Contemporary Arts. The hometown of U.S. President Gerald Ford also has many outdoor recreation opportunities, including the Grand River and nearby Lake Michigan. The area has a booming health care industry, and Spectrum Health is a major employer and service provider. Housing costs are relatively low, with older homeowners paying a median of $1,113 with a mortgage and $434 without one. Retiree renters pay a median of $726 per month to live in the Grand Rapids area. “If you want to have a peaceful, more quiet life and also more reasonable housing, consider the middle west,” says Charles Zhang, a certified financial planner for Zhang Financial in Grand Rapids, Michigan. “The cost of living in the middle west is very reasonable.”
A sports fans paradise, locals can root for the Steelers, Pirates and Penguins. The area is home to several major colleges, including Carnegie Mellon University and the University of Pittsburgh. UPMC Shadyside is ranked the 12th best hospital in the nation by U.S. News. But these big-city amenities are coupled with relatively low housing prices. Costs for older homeowners range from $1,069 with a mortgage to $468 without one. The median rent for retirees is $617 per month. Seniors age 65 or over can also ride the bus, T or Monongahela Incline for free.
(Nivek Neslo via Getty Images)
While northern Virginia has very high housing costs that aren’t likely to be covered by Social Security alone, costs drop significantly a little farther south in Richmond. “We’ve got a lot of folk in Richmond that retire from the D.C. area, and they are able to sell their house in the northern Virginia and D.C. area and maintain a really nice home when they come to Richmond,” says PJ Wallin, a certified financial planner and founder of Atlas Financial in Richmond. “They can buy a really nice home that might be half the cost.” The median retiree homeowner pays $1,282 per month with a mortgage, which drops to $465 among older residents who have paid off their homes. The median rent for senior citizens is $905 monthly. Virginia’s capital city is divided in two by the James River, which has whitewater rapids running through town. The area also has several well-regarded hospitals including the Virginia Commonwealth University Medical Center.
(traveler1116 via Getty Images)
Rochester, New York
While the winters on the southern shore of Lake Ontario can be cold and produce a prolific amount of lake-effect snow, the low housing costs might keep you in town. Older residents pay a median of $1,179 per month with a mortgage and $555 with a paid-off house. Seniors who rent are charged a median of $778 per month. Once the snow thaws, the flowers will bloom again, and Rochester has a large Lilac Festival to celebrate. The city boasts several major colleges, including the University of Rochester and the Rochester Institute of Technology, and the highly rated Strong Memorial Hospital.
(Richard Cummins / robertharding via Getty Images)
History buffs will delight in this old city that was colonized by the Spanish in the early 1700s. The San Antonio Missions were designated a World Heritage site in 2015. San Antonio is located on the southern edge of the scenic terrain and vineyards of Texas hill country. Health care is provided by the high-performing University Hospital. But these amenities don’t cost a fortune in San Antonio. Renters pay a median of $816 per month, while homeowners face costs ranging from a median of $1,146 monthly with a mortgage to $430 per month without one. The state of Texas also doesn’t have an income tax.
Spokane might be best suited to active retirees who love the outdoors. The Spokane River runs through town, and those who walk and bike along it are treated to views of several waterfalls, especially in the spring. Dams along the river are used to generate hydroelectric power. Several nearby ski resorts provide opportunities for winter fun. High-performing hospitals include Providence Sacred Heart Medical Center and Children's Hospital and Deaconess Hospital. Housing costs a median of $1,130 for retirees with a mortgage, but that drops to $425 per month among retirees who have paid off their home. Renters pay a median of $662 monthly.
(Cristie Guevara via Getty Images)
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The $15,834 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $15,834 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.