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Social Security Benefits May Be Delayed Until Age 70

by Mike

Lawmakers are considering legislation that would delay eligibility for full Social Security benefits until age 70 for millions of young Americans.

Today the full Social Security benefit retirement age is 66 for people born between 1943 and 1954.  It gradually increases by 2 months per birth year until reaching age 67 for those born in 1960 or after.

I’m only 33, so if the retirement age is delayed to age 70 I will certainly be affected.  But you know what?  I think I’m ok with it.

Let’s face reality.  The Social Security program is in serious trouble.  According to the Trustees Report, the Social Security trust fund is scheduled to run out by 2037, at which point there will only be enough taxable income to pay about 75% of scheduled benefits.

It’s obvious that something needs to be done, and since life expectancy is much higher today than it was back in FDR’s day it makes sense that the retirement age is adjusted accordingly.

But I don’t think that’s enough.  I’d also like to see an increase in the taxable maximum.

Social Security is financed through a dedicated payroll tax. Employers and employees each pay 6.2 percent of wages up to the taxable maximum of $106,800 (in 2010), while the self-employed pay 12.4 percent.  So if you make less than the taxable maximum your entire salary is taxed.  But if you make more than that, anything over the maximum is not taxed.

I’ve never really understood why the burden of paying for Social Security was almost entirely on the shoulders of the working class.  Why should a middle class worker making $106,800 pay the same amount ($6,621.60) in Social Security taxes as LeBron James?

You don’t think the wealthy are using smart Social Security strategies to ensure they receive the benefits they’re entitled to?  Of course they are…they didn’t get wealthy by making poor financial decisions and leaving money on the table.

I say up the taxable maximum.  It will increase the amount of taxable income without devastating the middle class and working poor.  And it will help insure that Social Security benefits are still around for the people who need them most.

What are your thoughts?  Are you willing to push your retirement back a few years or pay more in taxes if you earn over the taxable maximum?

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{ 14 comments… read them below or add one }

Evan

The reason there is a maximum to limit just HOW much of a rip off this is for the wealthy. If LeBron were subject to all that tax how much would he REALLY get out of it? I think the the current max pay out is around 40K pretax – in one year he’d fund his lifetime of all social security payouts!

I say let me make the choice of opting out! I would take it in a second, take back my 6.2 and my wife’s 12.4 (she is self employed), and invest in my own future.

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Mike

That’s a fair point…there is a maximum payout as well and that would have to be taken into account.

Allowing people to opt out would be dangerous though. Sure maybe you would do a great job investing that money and do far better than SS could provide, but I think you’d be the exception. Most people wouldn’t save that money at all and they’d be left with nothing at all come retirement. Imagine the uproar then.

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Financial Samurai

Hmmmm… a choice to opt out, now that’s an interesting one I haven’t thought of. Given I don’t count on SS to be around for me, that’s a great idea!

Mike, there’s a good chance we’ll be dead by 70….. given the median life expectancy is 78. But of course, the government knows this and is DEPENDING on some of this to happen. Love the government!

Best,

Sam
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Mike

That’s a valid point Sam. There’s no guarantee we’ll make it to retirement age. But if you make it to 70, I’ll buy you a drink. :)

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Budgeting in the Fun Stuff

Honestly, I’d be thrilled if waiting an additional 2 years was all that it would take to get 100% of the pay out I’m supposedly contributing to…the problem is that I’m 27 and I really dount they’ll only move it back by 2 years by the time I retire…

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Mike

That’s true, by the time you’re 70 the age could be pushed back again.

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Everyday Tips

Personally, I think there is to be a max. As was pointed out earlier, many people would pay wayyyy more than they would ever get in return. Not to mention, employers would also have to give more, and not many companies can afford that added expense either.

Personally, I am sick of the ‘rich’ being attacked and be expected to constantly give more and more. It is like people that have educated themselves, worked hard, and earned good money are villainized in this country. It just makes no sense to me.
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Mike

For the record, I didn’t mean to suggest that there should be no limit at all. Just an increase in the taxable maximum to help make up for the shortage. Maybe raising the limit to say $200,000 or $250,000 would be enough, I don’t know the answer.

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Everyday Tips

Well I do know they tend to increase it, not sure if it is annually or not. If they did double it as you mentioned, it would probably really affect the bottom line of many companies too.

Hope I did not seem argumentative. I just read an article just before I read your post about how the ‘rich’ were expected to be the only ones affected by some other tax, and I was just feeling frustrated. And, I am not even rich! :)
Everyday Tips´s last [type] ..Comparing Spending Habits of Different Generations

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Benjamin Bankruptcy

In Australia we have a sliding tax rate. (1 USD $ = 1.2 Aus $) up to $6,000 you pay no tax, to $35,000 you pay 15% to $80,000 you pay 30% up to 180000 you pay 38% and over $180,000 you pay 45% of your income to the tax man.

There’s not threshold, the more you earn the more you pay! The rich pay a higher percentage of their income to the government.

Imagine working your ass of to make $180,000 and you have to give half of ever dollar to the government!!!

Australian policy comes from the point of view that the working man is actually hard worker and the rich man is merely a trickster exploiting the working man.

We have benefits that run forever if you’re unemployed and their pegged at 50% of the average wage. What’s this lead to?

Well Australia has 22 million people but only 6.5 million work.

So 1/3rd of my paycheck disppears every week to suppor the other 15.5 million of my fellow country men who don’t feel like working or didn’t put enough away to pay for their retirement.
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Everyday Tips

Two more things.
1. I meant to say ‘I think there should be a max’

2. I am with Evan. Let me opt out of it. I think it is a crime that I have contributed all these years and there is a good chance it will be bankrupt before I can access my money.
Everyday Tips´s last [type] ..Comparing Spending Habits of Different Generations

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Craig

To be fair, the SS system is a flat tax with a progressive benefit.

Example: Person A makes $48k/yr and Person B makes $96k/yr. They both earn their salaries, adj for infl, for 35 years and then both earn $20k/yr until full retirement.

The SS payout formula takes the top earning years (adj for infl) for 35 calendar years, and excludes the other years. So the SS tax paid during the $20k years is basically sacrificed. The $48k equates to $4,000/mo and the $96k equates to $8,000/mo.

The SS formula assigns the following brackets: a) $761 at 90%, b) $3825 at 32%, and c) remaining balance at 15%.

So, the $4,000 is paid at $761*90% + $3239*32% = $1,721.

The $8,000 is paid at $761*90% + $3825*32% + $3414*15% = $2,421.

So, person B paid twice as much into SS (excl the $20k years), and receives only 40% more. That’s a progressive benefit.

If person C makes $192k/yr, they are only taxed for SS on $106,800 (11% more than the $96k person). Their benefit is based only on the $106,800, which equals $2,556 (6% more than the $96k person).

It’s really not THAT unfair. What IS unfair is that the wealthy tend to pay income tax at 15% or 20% because most of their income comes from dividends and capital gains, or nontaxable state bond income. Someone who goes to law school or med school, is paying at 35% plus the first $106,800 at 15.3% (if they own their own business).

This is why Warren Buffet talks about how his marginal tax rate is lower than those of the secretaries that work in any of his businesses.

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Mike

Craig, thanks for supplying some interesting numbers. I’m not really an expert on Social Security so I don’t know all the ins and outs. It just seems to me there has to be a straightforward way to fix it.

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Leigh

I think working to age 70 sounds feasible when you’re 20 or 30 years old, but it will sound less so as you age.

First off, you have to hope you are mentally and physically able to continue working to that point. This can be especially challenging for those in blue collar situations where their ability to stand or lift will be compromised. My mother was losing her faculties by age 62. She was in a nursing home by 67.

Second, you have to hope to be able to retain employment in your senior years. All of us with white collar jobs see younger people being hired at half our salaries with better, more recent skill sets. Considering there is no longer employee loyalty, expect that you will lose your job in your late 50s/early 60s. There will then be a massive gap between employment and retirement.

There’s a difference between having an increased life expectancy and having quality of life and employable functionality (if that’s a word). What sounds good on paper will not likely translate to real world application.

However unfair it may seem to increase the tax burden on the wealthy, it may be the only feasible solution.

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