What can YOU do about Social Security insolvency?

What do you think is the answer to this question? “The social security and medicare systems will avoid insolvency by:

  1. Increasing the  income tax rates and/or increasing the social security and medicare tax rates significantly and/or
  2. Reducing benefits to all of us and/or
  3. Reducing spending and creating an environment where businesses can thrive and/or
  4. Printing money causing rampant Inflation similar to the1970s and 1980s

The answer is D.

I strongly believe that congress and the President will “kick the can” to the next group of leaders who will “kick the can” to  next group of leaders.

 

What does this mean to you? You need to take care of yourself by:

  1. Reducing your income taxes by being proactive and smart!  and
  2. Spend less and invest more for your future.  Only you can take care of you!

Isn’t this just common sense? If you want to lose a few pounds, do you increase your intake of food and reduce your exercise? No, you do what common sense tells you to do.

 

What does the 2012 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds say:

 

  1. If lawmakers fail to take action until the combined trust funds become exhausted, then changes to maintain Social Security solvency will have to be “large and sudden.” The following examples illustrate the significant tax increases or benefit decreases that would be necessary to eliminate the shortfall for the 75-year projection period if no action is taken earlier:
  • Raise payroll taxes to approximately 16.7%, gradually rising to 17.1%, to fully finance scheduled benefits in every year starting in 2033; or
  • Reduce benefits by 25% starting in 2033, with reductions gradually reaching 27%.

What is another proposal not addresses in the report  is to significantly raise or eliminate the Social Security Old Age savings and disabilty “OASDI” taxable wage base, or subject a higher fixed percentage of workers’ earnings to payroll tax. (The HI base was removed in ’93.) When the Social Security program began in ’37, earnings subject to payroll tax represented 92% of covered earnings. In 2007, the share of covered earnings had fallen to 83%, with 6% of workers earning more than the wage base.

The annual report  makes projections relating to Social Security’s long-term financial viability, including the projected depletion of the OASDI trust fund in 2033, and suggests ways to alleviate this problem.

 

The FICA tax rate for employees and employers normally is 7.65% each-6.2% for OASDI and 1.45% for HI. However, for 2011 and 2012, the OASDI rate for employees is 4.2%.

For self-employed workers, the FICA tax normally is 15.3%-12.4% for OASDI and 2.9% for HI. However, for 2011 and 2012, the self-employment tax rate is 13.3%: 10.4% for OASDI, reflecting the two percentage point drop in the OASDI rate for employees, plus 2.9% for HI.

What is the Outlook for Social Security? In the long-term, the Trustees project that the dollar level of the combined trust funds will decline beginning this year in 2012 until assets are exhausted in 2033, three years sooner than earlier projections. I believe that the there will be updates that the the assets will be exhausted before 2033. 

Projected OASDI costs will generally increase more rapidly than projected non-interest income through 2035 due to the retirement of the “baby-boom” generation. After 2035, projected increases in life expectancy will still cause OASDI costs to increase relative to non-interest income (i.e., payroll taxes, taxes on scheduled benefits, and general fund transfers), but at a slower rate.

The report encourages lawmakers to address the projected trust fund shortfalls “in a timely way” so as to give workers and beneficiaries time to plan and adjust accordingly. The report includes four recommendations for keeping the Social Security program solvent throughout the 75-year projection period. Lawmakers could:

  1. Immediately and permanently increase the combined employer and employee OASDI payroll tax rate from 12.4% to 15.01%;
  2. Reduce scheduled Social Security benefits for the projection period in a manner equivalent to an immediate and permanent reduction of 16.2%;
  3. Draw on alternative sources of revenue; or
  4. Adopt some combination of these approaches

Please email me at jeff@jbrookswa.com   Jeff Brooks, CPA, CFP, MBA for JBrooks Wealth Advisors, PC.

 

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com