The message from two new pieces of proposed Social Security legislation is clear: We have passed the point where we can expand benefits.
The key point is not what is in the proposals but how they fail. As ineffective as the proposals are, pain will only get worse with time.
Advisors should take a close look at how Congress is proposing to deal with the financial gaps that have developed within the Social Security system over the past 40 years. For the first time in history, changes are going to affect a majority of voters – your clients.
While these proposals have little chance of success, they demonstrate how little success taxes have on extending the life of Social Security. That conclusion should be viewed in the context that the longer we wait to address the system’s shortfall, the harder it gets.
Fixing the system will never be easier.
The program has $19.8 trillion in promises for which it does not expect to generate revenue. The current structure of the program means that retirees would experience a reduction of benefits in roughly 12 years, which approximately equates to the life expectancy of a typical 75-year-old.
This concern is greater for women, who tend to live longer. In fact, the SSA expects that a woman turning 77 today will live for another 12.1 years.
Over the last couple of weeks, two pieces of legislation have been introduced in Congress: Safeguarding American Families and Expanding Social Security Act (SAFE) in the Senate and Social Security 2100: A Sacred Trust Act (SS2100) in the House. Neither proposal fills the gaps in the program's finances, and both fail in a way that financial advisors should note.
At a high level, SS2100 would phase-out the cap on taxable wages over 30 years, raising about $11 trillion. It would increase spending by $1 trillion, mainly through a temporary expansion of benefits across a range of priorities. In total, the proposal would extend the solvency picture to 2038.
The improvement promised is modest compared to what SS2100 supporters have advocated for in the past. Historically, the 2100 brand meant changes that would enable the system to pay better benefits through the end of the century, or 80 years. The latest proposal shows that expanding the revenue base by $10 trillion would only add four years to the projected solvency of the system. That outlook assumes that all the temporary measures are allowed to expire in 2027.
Seniors would face a benefit crisis in 2027 rather than 2034. At that time, the go-to policy of eliminating the cap to pay the bills would already be used up. If there is a way to provide better benefits over a longer period of time, Democrats can't find it.
Thus, the more apt name for the legislation would be “Social Security 2038: The Brutal Truth.” The hard truth is that Congress has done nothing for so long that even draconian taxes will not put the system into balance.
The SAFE Act was introduced by Senator Schatz (D-HI). The Social Security Administration believes that his changes would enable the program to pay scheduled benefits until 2050. On the revenue side, the proposal would include a 5.7% increase to the net investment Income tax (NIIT) on top of eliminating the cap on taxable wages. So, this would be a direct hit to some of your clients. But 2050 is not much comfort for working Americans. It means that someone who is 59 today would face the same problem that today’s 75-year-old faces. In 2038, he or she would turn 75 with the expectation of living beyond the program’s ability to pay scheduled benefits.
Typically, your clients believe that the potential of benefit cuts is near zero. Few are aware that the program generated nearly 50% of its unfunded liabilities over the last four years. Few policy experts mention the size of the problem; it is as though the size of the imbalances does not make a difference. It is a blinding dogma that Congress will fix it, regardless of what “it” is.
If dealing with Social Security were easy, the solution would have been applied. Congress isn’t hiding easy choices. It is postponing hard ones, and the choices will affect your clients. If Social Security pays its bills, the revenue will have to come from somewhere. It is reasonable to expect an adjustment to the cap on wages subject to the payroll tax. Congress will have to lean on taxes on investment income to pay some of these bills.
For advisors, the key fact about Social Security that needs to be conveyed to clients is that the longer we wait the harder the solution will be on you – the client. This may mean more taxes for your working clients, and more taxes on those who are retired.
We have crossed the point where expanding benefits is possible. The message from SS2100 and SAFE is that legislators must choose between better benefits now or scheduled benefits for retirees in the future. You can’t have both.
If having both were possible, one of the 200 co-sponsors of SS2100 would have proposed it instead of five years of temporary benefits.
Brenton Smith writes on the issue of Social Security reform with work appearing in Barron's, Forbes, MarketWatch, TheHill, USAToday, and more. He can be reached at [email protected].
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The message from two new pieces of proposed Social Security legislation is clear: We have passed the point where we can expand benefits.