Workers younger than 66 lose up to $100,000 in Social Security lifetime benefits on April 29.
Why? Because the “File and Suspend,” Social Security claiming strategy, which allowed a retiree to take benefits off of a spouse’s record while deferring his or her own record, has been eliminated.
I believe this decision was based on one paragraph of the 2015 federal budget proposal. The graph said the budget proposed 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 veracity 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 and provide the most jobs of any sector of the economy: small business owners. And though no one knows assuredly if 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 that, “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.
Pundits are already exploring what means testing to obtain Social Security income might look like. Under one recent plan posed by David John of the conservative Heritage Foundation, for the AARP Public Policy Institute, high-income couples or individuals earning more than $55,000 in non-Social Security retirement income would see their monthly benefits reduced. For every $1,000 of income they have over $55,000, their Social Security benefits would be reduced by about 1.8 percent. So, if non-Social Security retirement income equaled $65,000, their 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 income was over $165,000.
This plan reduces benefits for about 4.5 percent of retirees and eliminates benefits for another 4.5 percent, according to John. Keep in mind that the top 20 percent of wage earners who make more than $134,000 per year pay 84 percent of all U.S. taxes.
Business owners can implement strategies to implement to prevent this loss of future income they have paid for and planned for during their retirement lifetimes. The number-one strategy that needs to be implemented is a well-designed pension or Defined Benefit plan.
Unlike IRAs and 401(k)s, which allow business owners to invest up to $23,000 annually, these specialized Defined Benefit plans– if properly structured– can significantly increase contributions and reduce taxes 50 percent in some cases, a double benefit. Additionally, these unique, fully-insured plans can create guaranteed lifetime income streams of well over $100,000 per year.
In your 30s, contributions can equal over $125,000 per year; in your 40s, nearly $200,000; and in your 50s to 60s, well over $300,000 per year.
An additional benefit is that these plans are creditor-proof from legal liability and bankruptcy. WealthManagement.com has reported that O.J. Simpson, who has a $33 million civil judgment against him and is serving a prison term for armed robbery, still receives hundreds of thousands of dollars per year from his pension or Defined Benefit plan.
The bottom line is, we don’t know if and when means testing will occur. But this has been an option from the day the Social Security program was enacted.
Business owners should be prepared and proactive. The elimination of File and Suspend could be the beginning of means testing for Social Security for those of us younger than 66– which includes the majority of people in the workforce today.
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David Reyes is founder of Reyes Financial Architecture of La Jolla, a Registered Investment Advisory firm that acts as a fiduciary and specializes in portfolio risk management strategies, retirement income distribution and Social Security planning. He has been named the National Social Security Advisor of the Year, an annual award given to professional advisors who are knowledgeable and passionate advocates for Social Security education.