Means testing to attain Social Security benefits may be on the docket for the future.
Those of us who counsel clients on Social Security understand firsthand the long-term effect of Congress’ recent elimination of the File and Suspend and Restricted Application claim strategies. That change means fewer claim strategies for retirees seeking to maximize Social Security income, effectively cutting $100,000 of lifetime benefits from a married couple’s retirement portfolio.
I believe the Congressional decision to eliminate these strategies was based on one paragraph of the 2015 federal budget proposal, which aimed to eliminate “aggressive Social Security claiming strategies, which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement.” The truthfulness of this statement depends on what you mean by the words “upper income.” Means testing to obtain Social Security benefits could have the largest impact on the people who work hardest of any sector of the economy: middle-class professionals and small business owners. And, though no one knows definitively whether means testing will become a reality, there’s enough discussion nationwide now that the subject needs to be explored.
In 1934, President Franklin D. Roosevelt addressed the Social Security founding committee and said it “takes so very much money to provide even a moderate pension for everybody, that when the funds are raised by taxation only, a ‘means test’ must necessarily be made a condition of the grant of pensions.” In short, he said taxpayer-paid retirement benefits should go only to those who really need them.
I beg to differ. Retirees of all income levels have already paid for these options. The middle class used these claiming strategies and is the one class who needs them most. Plus, even if every Social Security beneficiary took advantage of these so-called “aggressive” claiming strategies, it would affect our federal budget by less than one-quarter of 1 percent.
According to the Natixis Retirement Savings Study, baby boomers aged 51 to 69 have saved only 20 percent of the funds they need to retire. This means a married couple has saved an average of $185,000 when spouses will need at least $1 million to carry them through the next 30 years. Thirty percent of Americans from the ages of 65 to 69 are still in the workforce, according to the U.S. Census Bureau, which likely means Medicare and Social Security are not covering basic living expenses for our older population.
Baby boomers are part of the “Sandwich Generation,” too. They still support millennial children, whose college costs rose more than 1,000 percent since 1980 and who are faced with a difficult job market. On the other end, boomers also often support aging parents with long-term health care costs or daily expenses. Twenty-one percent of U.S. seniors over age 75 still carry a mortgage, compared to 6 percent back in 1989. And after these fiscal responsibilities are over, boomers will need to take care of themselves.
Pundits are already exploring what Social Security means testing might look like. Under one recent plan posed in 2012 by David John, then of the conservative Heritage Foundation, high-income couples or individuals earning more than $55,000 in non-Social Security retirement income would see monthly benefits reduced. For every $1,000 of income they have over $55,000, Social Security benefits would be reduced by about 1.8 percent. So, if non-Social Security retirement income equaled $65,000, benefits would be reduced by 18 percent. In another means testing scenario posited by John, couples could see reduced benefits if they had non-Social Security income equaling $110,000. They would receive no Social Security benefits if outside income was over $165,000.
Don’t forget that by 2033, the Social Security program will be underfunded. If no action is taken before then, Social Security beneficiaries will take a 23 percent benefit cut. For some retirees, 85 percent of those benefits are already taxable. The Society of Actuaries reports that only half of Americans meet with a financial advisor. Those without a professional to guide them into retirement will either have to become experts on investing and tax law or watch in dismay as their nest eggs shrink over time.
The bottom line is, we don’t know if and when means testing will occur. But this has obviously been an option from the day the Social Security program was enacted. Don’t allow your clients to feel like the last one standing at musical chairs. Keep counseling them to earn, save, protect assets and invest.
David Reyes is founder of Reyes Financial Architecture of La Jolla, Calif.