The Good, the Bad, the Ugly and the Uncertain

As we come to the close of another year, I thought it only appropriate to update the status of Social Security heading into 2023.  Next month I’ll be speaking to the TXCPA in Houston and the above is the topic for my session taken from that classic western movie starring Clint Eastwood.

I’ve got some Good News & I’ve Got Some Bad News

On the positive side (GOOD) we’ll all be looking at an 8.7% increase in benefits next year on top of this years increase of 5.9%.  What many people don’t understand is whether you’re claiming or not the cost of living adjustment is credited to your benefits or projected benefits (GOOD).  Now why the increase in benefits?  According to the Heritage Foundation the average American family lost $7,100 due to inflation in 2022. (BAD)

On a negative side (BAD), one will pay Employment Taxes up to $160,200 up from $147,000 in 2022.  That means that if you own your own business, you will pay 12.4% or $19,864 in FICA, this does not include Medicare taxes which one would pay on ALL one’s earned income (BAD)!

Whenever I see this number it think back to 1975, my first year out of college, the maximum earnings subject to FICA taxes was $14,100.  Now I know we’ve had inflation over the 47 years, but this increase is way beyond what inflation has run over this time frame (BAD).

Assuming one maxed out their FICA taxes (GOOD) over the past 40 years was born in 1960 (Age 22-61), they would have paid $203,128 in FICA taxes and their employers would have paid the same amount.  Total FICA taxes $406,255 (BAD).  If they claim benefits at FRA which is 67 their check assuming a 2% COLA would be $44,472 per year (GOOD).  Should they live to age 100 they will have received $2,138,159 (GOOD). This does not take into consideration any spousal benefits (GOOD)Motto:  Don’t Die Early! (BAD)

Financial Health of Social Security Trust Fund and Outlook (UGLY)

Social Security has projected a $20.4 Trillion long term deficit (BAD), without changes, benefits will be reduced by 20% in 2035 and by 26% in 2096.  If one looks up the definition of procrastination in the dictionary you’ll see a picture of Congress, so yes, they’ll get around to addressing this shortfall before 2035 but who knows when (UNCERTAIN).

Democrat Proposals to fix Social Security

  • Reinstate FICA taxes on Earnings in excess of $400,000 (thus you’d create a donut hole between $160,200). They estimate over $1 Trillion of earnings would be subject to FICA taxes.
  • Change current COLA from CPI-W (Wage Inflation) to CPI-E (Elderly goods and services)
  • Increase the minimum payout of benefits from $951 / mo. to 125% of Federal Poverty Level or and increase of approximately $500 / mo. for lower earning beneficiaries
  • Boost the PIA (Full Retirement Amount) by 1% per year from ages 78 to 82 means a 1% annual increase in benefits upon attaining age 78 to help offset higher cost of living and healthcare

Personal Observation:  This does nothing to fix underlying financial issues faced by Social Security, but just another scheme to tax the rich.  The problem is there are not enough rich people to get to the real issues.

My Crystal Ball of how solvency will be accomplished

  • Move to FRA (Full Retirement Age) from 67 for those born in 1960 or later to 68 – 70. Much like Reagan did in 1983 when they moved it from 65 – 67.  They eased this change in over 22 years and it didn’t affect anyone who was over 50 years of age when signed into law. (GOOD).
  • Continue to raise the Earnings Amount one pays FICA taxes on.
  • Possibly increase the FICA taxes from 12.40% (50/50 between employer and employee). Talk of increasing it by 10 bps per year for 20 years = a 2% increase when fully enacted.
  • Incorporate the Democratic proposal of increasing tax on earnings in excess of $400,000, increasing benefits for lower income individuals and changing the COLA to Elderly expenses versus Wages.

Bottomline:  I don’t see any changes for those of use over 55 years of age (possibly 50 years old) (GOOD) a combination of higher taxes and an increase in the FRA will keep Social Security solvent for decades.

The #1 objective of every politician is the get reelected, one doesn’t mess with 70 million Social Security recipients and hope to get reelected!

The 3 Truths of Life

  • Truth #1 The Only Certainty in Life is Uncertainty
  • Truth #2 Life is Not Fair
  • Truth #3 You Have to Play the Hand Your Dealt

Living in today’s MESSED UP WORLD it would be wise to embrace these 3 Truth’s as Gospel and accept the curveballs thrown at us, as just a part of life.  As we approach a New Year there will Be Good, there will be Bad, there will be the Ugly and will there most certainly will be Uncertainty!  As Solomon said in his autobiography “We will never figure it out, while living under the sun!” and “Fear God and keep his Commandments, for this is the whole duty of man.”

I wish you all a Happy – Joyous – Prosperous & Healthy New Year! Never hesitate, reaching out if you think I can be of assistance!

Dave Zander, CFP®
MLS# 1603774