The Future of Social Security?

By Dr. Steven Weisbart, Chief Economist, Insurance Information Institute

Beginning in 2020, the Social Security fund for retirees will be paying out more than it is taking in. This means that if there are no significant changes, in about 2034 the fund will exhaust the surplus it had built up since 1983. In that case, income to Social Security (from FICA taxes) will only be able to fund about 75 percent of benefits payable. It is for this reason that surveys show that many people under age 50 believe that Social Security won’t be available to provide retirement income for them.

Since Social Security income will be an important part of virtually everyone’s retirement, and since 2035 isn’t very far off (in financial planning terms), we should all be mindful of what might happen, and what we can do now to cope with adverse scenarios.

The government currently has no plan for what to do when the money runs short. One possibility is that everyone’s check in 2035 will be for 75 percent of what it was in 2034. Another possibility is that all those who received checks in 2034 will get the same amount in 2035 and new recipients will have benefits trimmed to fit the remaining funds. A third possibility is that those who are entitled to the highest dollar benefits will get nothing (on the presumption that they had high incomes and so likely have other sources of retirement income) so that those with smaller benefits can be paid their whole entitlement. And other possibilities exist, too.

It’s also possible that Congress will act to change the program so that none of these possibilities take place. Indeed, earlier this year H.R. 860 (The Social Security 2100 Act) was introduced in the U. S. House of Representatives to do just that. The House Ways & Means Committee held a hearing on this bill on July 25, 2019. As of July 30, the bill had 211 co-sponsors—nearly enough for the full House to pass the bill and send it on to the Senate.

There are essentially seven major provisions in H.R. 860. Two of them raise payroll taxes to help fund Social Security benefits. Oddly, other provisions raise Social Security benefits. The two that raise payroll taxes are:

• Payroll subject to taxation. Currently, Social Security payroll tax (on employee and employer) currently stops at $132,900 (indexed by increases in the average wage). H.R. 860 would create a new payroll tax beginning at $400,000 without cap. The $400,000 would be frozen (not indexed), so that over time, an increasing number of people would be affected by it.
• Payroll tax rate increase. Currently the payroll tax is 6.2 percent on employer and employee. H.R. 860 would raise it by 0.05 percentage points per year over 24 years (beginning in 2020) up to 7.4 percent (in 2043) each on employer and employee. Note that this higher rate would apply to payroll income up to $132,900 (indexed) and payroll income of $400,000 and over (not indexed). Note that if average wages grow at 2 percent per year, the $132,900 in 2019 would become $213,800 in 2043 and keep climbing after that.

The provisions that raise Social Security benefits are mostly focused on low- and moderate-income earners:

• There would be a small increase in the formula for the lowest “tier” for computing benefits. This would affect everyone receiving benefits. The percent effect on checks would depend on the base amount but because this change affects only the lowest tier, it would have the greatest effect on those whose average career wage was low. One actuary estimated the dollar increase to be $28.
• Cost of living adjustment (COLA) change. Currently, the COLA for Social Security is the CPI-W (the cost of living for wage earners). Since 1982 the Bureau of Labor Statistics has been computing a cost-of-living index for elderly consumers (62 and over)—designated the CPI-E—which H.R. 860 would substitute for the CPI-W in the Social Security COLA formula. Because the CPI-E weighs spending on medical care and housing more heavily than does the CPI-W, and because prices in these categories have been rising faster than other categories, it is estimated that if past trends continue, this change could increase the COLA by 0.2 percent per year.
• Alternative minimum benefits. For individuals who worked for more than 10 years, the bill creates an alternative minimum benefit. A qualifying beneficiary would receive that alternative minimum if it is higher than the standard calculated benefit amount.
• Income taxation of Social Security benefits. The thresholds for income taxation of Social Security income currently are expressed in frozen dollar amounts but H.R. 860 would double these amounts. This would lower the income to the Social Security reserve funds but would make Social Security income-tax-free for more people.
• Earnings-related benefits. New (but tiny) additional benefits for retirees whose average earnings were $400,000 and above to recognize the new payroll taxes they’ll pay while working.

The Future of Social Security?

By Dr. Steven Weisbart, Chief Economist, Insurance Information Institute

Beginning in 2020, the Social Security fund for retirees will be paying out more than it is taking in. This means that if there are no significant changes, in about 2034 the fund will exhaust the surplus it had built up since 1983. In that case, income to Social Security (from FICA taxes) will only be able to fund about 75 percent of benefits payable. It is for this reason that surveys show that many people under age 50 believe that Social Security won’t be available to provide retirement income for them.

Since Social Security income will be an important part of virtually everyone’s retirement, and since 2035 isn’t very far off (in financial planning terms), we should all be mindful of what might happen, and what we can do now to cope with adverse scenarios.

The government currently has no plan for what to do when the money runs short. One possibility is that everyone’s check in 2035 will be for 75 percent of what it was in 2034. Another possibility is that all those who received checks in 2034 will get the same amount in 2035 and new recipients will have benefits trimmed to fit the remaining funds. A third possibility is that those who are entitled to the highest dollar benefits will get nothing (on the presumption that they had high incomes and so likely have other sources of retirement income) so that those with smaller benefits can be paid their whole entitlement. And other possibilities exist, too.

It’s also possible that Congress will act to change the program so that none of these possibilities take place. Indeed, earlier this year H.R. 860 (The Social Security 2100 Act) was introduced in the U. S. House of Representatives to do just that. The House Ways & Means Committee held a hearing on this bill on July 25, 2019. As of July 30, the bill had 211 co-sponsors—nearly enough for the full House to pass the bill and send it on to the Senate.

There are essentially seven major provisions in H.R. 860. Two of them raise payroll taxes to help fund Social Security benefits. Oddly, other provisions raise Social Security benefits. The two that raise payroll taxes are:

• Payroll subject to taxation. Currently, Social Security payroll tax (on employee and employer) currently stops at $132,900 (indexed by increases in the average wage). H.R. 860 would create a new payroll tax beginning at $400,000 without cap. The $400,000 would be frozen (not indexed), so that over time, an increasing number of people would be affected by it.
• Payroll tax rate increase. Currently the payroll tax is 6.2 percent on employer and employee. H.R. 860 would raise it by 0.05 percentage points per year over 24 years (beginning in 2020) up to 7.4 percent (in 2043) each on employer and employee. Note that this higher rate would apply to payroll income up to $132,900 (indexed) and payroll income of $400,000 and over (not indexed). Note that if average wages grow at 2 percent per year, the $132,900 in 2019 would become $213,800 in 2043 and keep climbing after that.

The provisions that raise Social Security benefits are mostly focused on low- and moderate-income earners:

• There would be a small increase in the formula for the lowest “tier” for computing benefits. This would affect everyone receiving benefits. The percent effect on checks would depend on the base amount but because this change affects only the lowest tier, it would have the greatest effect on those whose average career wage was low. One actuary estimated the dollar increase to be $28.
• Cost of living adjustment (COLA) change. Currently, the COLA for Social Security is the CPI-W (the cost of living for wage earners). Since 1982 the Bureau of Labor Statistics has been computing a cost-of-living index for elderly consumers (62 and over)—designated the CPI-E—which H.R. 860 would substitute for the CPI-W in the Social Security COLA formula. Because the CPI-E weighs spending on medical care and housing more heavily than does the CPI-W, and because prices in these categories have been rising faster than other categories, it is estimated that if past trends continue, this change could increase the COLA by 0.2 percent per year.
• Alternative minimum benefits. For individuals who worked for more than 10 years, the bill creates an alternative minimum benefit. A qualifying beneficiary would receive that alternative minimum if it is higher than the standard calculated benefit amount.
• Income taxation of Social Security benefits. The thresholds for income taxation of Social Security income currently are expressed in frozen dollar amounts but H.R. 860 would double these amounts. This would lower the income to the Social Security reserve funds but would make Social Security income-tax-free for more people.
• Earnings-related benefits. New (but tiny) additional benefits for retirees whose average earnings were $400,000 and above to recognize the new payroll taxes they’ll pay while working.

Ask a life insurance agent

The Triple-I blog received the terrific opportunity to ask State Farm life insurance agent, Robert Stevenson, a few questions about getting the most out of the often-misunderstood financial product.

What is your educational background and what was the path that led you to become a life insurance agent?

Robert Stevenson: I grew up in Savannah, Georgia and attended Hampton University in Virginia. I was working on my master’s degree when I accepted an opportunity with State Farm Insurance Corporate Headquarters. My job was to help the company expand its presence on the east and west coast. During that time, I learned about becoming a State Farm agent, and fell in love with it. I worked hard, and in December of 2000, opened my agency in New York, New York. As a State Farm agent, I’m a small business owner – I get to know people on a personal level. Helping them manage the risks of everyday life, recover from the unexpected, and realize their dreams is truly rewarding. I’ve never looked back.

What advice would you give students that are considering becoming life insurance agents?

RS: You have to listen and you have to care. This is more than a job. It’s helping people protect what’s most important to them. People don’t always want to talk about life insurance. It’s uncomfortable. But, let’s be honest. Someday you will die. No one in the history of the world has ever cheated it. That’s why, you have to make sure people are protected, and that they understand the bigger picture. You’re taking care of families and protecting the lifestyle they spent years building. While nothing can bring someone back, a family’s dreams can still be achieved because their loved one had life insurance. It’s truly a gift of love. You need to help people understand this.

What is the most common misconception that your clients have about life insurance?

RS: That they don’t need it. That they have enough. Often, I’ll hear the response, “I have it through my employer.” But, there’s a chance that benefit can be taken away. Also, if you have life insurance though an employer, and you get a new job, you might not receive the same coverage in your new position. Or, if you retire, it’s likely you won’t receive the same amount you once had. It’s wise to be proactive and read the fine print. Health and age also play a role in life insurance. I often hear, “I’ll wait till I’m married or have kids to get it.” Problem is, as we get older, our health tends to decline. Therefore, if you wait to get life insurance, you’ll likely end up paying more for it.

How do you help a client determine how much insurance they need and what type of policy is best for them?

RS: I start by forecasting. I ask customers questions like, “Where do you want to be in five, 10, 20, 30 years? Do you want to be married? Own a business? Have children? Travel? What’s your dream?” It’s vital for people to understand the importance of investing so they can generate more income as the years go by. Life insurance is not an afterthought. It’s the foundation of an investment strategy. You can’t invest in mutual funds, or stocks, or your child’s college, or buy rental properties, etc., if you don’t have the income. If something happens to you – your family is able to replace your income and still achieve their dreams.

It’s also important to help customers understand the difference between term life and whole life. Term does exactly what it sounds like – it covers you for a period of time. If you die within that period of time, your family is covered. But, think about this. Let’s say you’re 35, and you want to buy 20 or 30 years of term life insurance. Do you think you’ll be living 20 or 30 years from now? When I ask people that question, most answer, “Yes.” That’s when I remind them, when 20/30 years goes by and they’re still living, they won’t receive this payout.  Whole life covers you for the entire length of your life. No matter what. It guarantees your family will get paid. It’s more expensive up front, but you’re guaranteeing a payment – it builds value you can cash out.

How does one make sure that their life insurance policy does not get lost and that their beneficiaries get paid as quickly as possible after their death?

RS: When we sell a life policy, we tell our clients, “Make sure your loved ones are aware of the policy and each of you know where important documents are located.” For example, the safe in your house. Also, as life changes, periodic updates with your State Farm agent or financial planner are a smart idea to ensure everyone is on the same page.

What professional achievement are you most proud of?

RS: That’s a tough one. I’d say, when I got my securities license. It allows you to sell packaged investment products like mutual funds and variable annuities. Getting this takes a lot of work and involves rigorous testing. I had one opportunity to pass it. That was a lot of pressure. But it was worth it. Getting my securities license gave me the opportunity to open my office and help people.

What do you like to do in your spare time?

RS: I enjoy reading and golf. Having activities like these lets me to unwind. But more so, I love spending time with my family. I have a son and a daughter who keep me busy. Family time is important. All things in equal parts. That’s what keeps life joyful.

Ask a life insurance agent

The Triple-I blog received the terrific opportunity to ask State Farm life insurance agent, Robert Stevenson, a few questions about getting the most out of the often-misunderstood financial product.

What is your educational background and what was the path that led you to become a life insurance agent?

Robert Stevenson: I grew up in Savannah, Georgia and attended Hampton University in Virginia. I was working on my master’s degree when I accepted an opportunity with State Farm Insurance Corporate Headquarters. My job was to help the company expand its presence on the east and west coast. During that time, I learned about becoming a State Farm agent, and fell in love with it. I worked hard, and in December of 2000, opened my agency in New York, New York. As a State Farm agent, I’m a small business owner – I get to know people on a personal level. Helping them manage the risks of everyday life, recover from the unexpected, and realize their dreams is truly rewarding. I’ve never looked back.

What advice would you give students that are considering becoming life insurance agents?

RS: You have to listen and you have to care. This is more than a job. It’s helping people protect what’s most important to them. People don’t always want to talk about life insurance. It’s uncomfortable. But, let’s be honest. Someday you will die. No one in the history of the world has ever cheated it. That’s why, you have to make sure people are protected, and that they understand the bigger picture. You’re taking care of families and protecting the lifestyle they spent years building. While nothing can bring someone back, a family’s dreams can still be achieved because their loved one had life insurance. It’s truly a gift of love. You need to help people understand this.

What is the most common misconception that your clients have about life insurance?

RS: That they don’t need it. That they have enough. Often, I’ll hear the response, “I have it through my employer.” But, there’s a chance that benefit can be taken away. Also, if you have life insurance though an employer, and you get a new job, you might not receive the same coverage in your new position. Or, if you retire, it’s likely you won’t receive the same amount you once had. It’s wise to be proactive and read the fine print. Health and age also play a role in life insurance. I often hear, “I’ll wait till I’m married or have kids to get it.” Problem is, as we get older, our health tends to decline. Therefore, if you wait to get life insurance, you’ll likely end up paying more for it.

How do you help a client determine how much insurance they need and what type of policy is best for them?

RS: I start by forecasting. I ask customers questions like, “Where do you want to be in five, 10, 20, 30 years? Do you want to be married? Own a business? Have children? Travel? What’s your dream?” It’s vital for people to understand the importance of investing so they can generate more income as the years go by. Life insurance is not an afterthought. It’s the foundation of an investment strategy. You can’t invest in mutual funds, or stocks, or your child’s college, or buy rental properties, etc., if you don’t have the income. If something happens to you – your family is able to replace your income and still achieve their dreams.

It’s also important to help customers understand the difference between term life and whole life. Term does exactly what it sounds like – it covers you for a period of time. If you die within that period of time, your family is covered. But, think about this. Let’s say you’re 35, and you want to buy 20 or 30 years of term life insurance. Do you think you’ll be living 20 or 30 years from now? When I ask people that question, most answer, “Yes.” That’s when I remind them, when 20/30 years goes by and they’re still living, they won’t receive this payout.  Whole life covers you for the entire length of your life. No matter what. It guarantees your family will get paid. It’s more expensive up front, but you’re guaranteeing a payment – it builds value you can cash out.

How does one make sure that their life insurance policy does not get lost and that their beneficiaries get paid as quickly as possible after their death?

RS: When we sell a life policy, we tell our clients, “Make sure your loved ones are aware of the policy and each of you know where important documents are located.” For example, the safe in your house. Also, as life changes, periodic updates with your State Farm agent or financial planner are a smart idea to ensure everyone is on the same page.

What professional achievement are you most proud of?

RS: That’s a tough one. I’d say, when I got my securities license. It allows you to sell packaged investment products like mutual funds and variable annuities. Getting this takes a lot of work and involves rigorous testing. I had one opportunity to pass it. That was a lot of pressure. But it was worth it. Getting my securities license gave me the opportunity to open my office and help people.

What do you like to do in your spare time?

RS: I enjoy reading and golf. Having activities like these lets me to unwind. But more so, I love spending time with my family. I have a son and a daughter who keep me busy. Family time is important. All things in equal parts. That’s what keeps life joyful.