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 III’s Michael Barry briefs our membership every Wednesday on key insurance related stories. Here are the top stories this week:
- Northern California’s Pawnee Fire began on Saturday, June 23, and is threatening hundreds of homes in Spring Valley (Lake County). Meanwhile, the Creek Fire started on Sunday, June 24, and prompted evacuations near Happy Valley and Igo (Shasta County).
- Florida’s Limerock Fire either destroyed or damaged dozens of homes in Eastpoint (Franklin County), with at least 175 residents displaced due to the Sunday, June 24, blaze.
- Americans are reaching retirement age in worse financial shape than the prior generation for the first time since the Truman administration, a front page Wall Street Journal Weekend Edition story (June 23-24) stated.
The Insurance Information Institute’s Chief Economist, Dr. Steven Weisbart offers his insight on the impact on life insurance and retirement of the demographic trends highlighted in a recently released Census report.
The report projects that by 2030, the year when all baby boomers will be older than 65, one in every five Americans will be of retirement age. By 2035 older adults will outnumber children for the first time in U.S. history.
On life insurance: The population age 25-44 (the main life-insurance-buying group) was 85.15 million strong in 2016. The Census Bureau projects it to grow to 88.8 million in 2020, to 94.4 million in 2030, and 95.1 million in 2040. The number of children under age 18 was 73.6 million in 2016. The census bureau projects it to grow to 73.9 million in 2020, to 75.4 million in 2030, and 76.8 million in 2040. Thus the size of the “breadwinner with children” segment of the population is projected to grow very slowly in the next two decades, meaning that the market for life insurance will grow very very slowly.
On retirement: the population age 85+ (the main long-lived retirement group) was 6.4 million strong in 2016. The Census Bureau projects it to grow to 6.7 million in 2020, to 9.1 million in 2030, and 14.4 million in 2040. You can see the explosive growth in these projections. We can only hope that people age 63 today, many of whom will live to 85 in 2040, have saved enough to draw sufficient retirement income to pay all of their bills then. Otherwise, this could develop into a massive social problem.
While the American dream is still alive in 2009, sweeping changes in the economy have led to a reevaluation of priorities for most Americans. The third annual MetLife study finds that amid the economic crisis individuals are placing a premium on financial protection and stability. Across generations, eight in 10 say having a personal safety net will be more important this year than last. However, nearly 74 percent admit to not having an adequate safety net in place. MetLife found that Americans count auto insurance (60 percent), health insurance (57 percent), life insurance (46 percent), homeownersÃ¢â‚¬â„¢ insurance (45 percent), a retirement savings plan such as a 401(k) (40 percent), and cash on hand for 3-6 months (35 percent) as the top six components of their safety net. Among those who do not feel they have adequate protection, nearly two-thirds (62 percent) desire cash on hand for 3-6 months as the product they would most like to have in their safety net. The MetLife study also reveals that some 84 percent of individuals believe the U.S. economy is heading in the wrong direction, up from 64 percent in November 2006. More than nine in 10 believe that it will take at least 12 months for the economy to recover. To help put your financial house in order, take an inventory of your financial situation with free software from theÃ‚ I.I.I. Check it out at http://www.myfinancialhouse.org/
Six in 10 Americans underestimate life expectancy and almost half (49 percent) underestimate the amount of pre-retirement income theyÃ¢â‚¬â„¢ll need once they retire. The MetLife 2008 Retirement Income IQ Test also reveals that almost seven in 10 (69 percent) pre-retirees overestimate how much they can draw down from their savings Ã¢â‚¬“ with an alarming 43 percent saying they believe they can withdraw 10 percent or more each year while preserving their principal. This is despite the fact that most retirement experts suggest a withdrawal rate of no more than 4 percent annually. MetLife said the lack of understanding is particularly concerning because poor retirement planning assumptions are compounded after retirement by todayÃ¢â‚¬â„¢s much longer life expectancy. The study findings also point to a gender divide with 65 percent of men vs. 50 percent of women somewhat or very confident that they will have enough money to live comfortably if they live until 85 years of age. To get a better picture of your current financial situation and work towards your financial goals, check out I.I.I.Ã¢â‚¬â„¢s personal finance software at http://www.myfinancialhouse.org/
Is the title of a two-hour PBS documentary on the financial challenges and options facing AmericaÃ¢â‚¬â„¢s baby boomers that will debut nationally next Monday (March 31). Dr. Steven Weisbart, I.I.I.Ã¢â‚¬â„¢s chief economist, will appear in the program that will be aired in separate, one-hour installments. The first episode, Ã¢â‚¬ËœHazards and Vicissitudes,Ã¢â‚¬â„¢ offers a look at the origins of retirement in the U.S. and the creation of Social Security and Medicare. In the second segment, Ã¢â‚¬ËœOn Our Own,Ã¢â‚¬â„¢ the focus shifts to how Americans are more personally involved today than previous generations in planning for their own retirement. The second segment, featuring Dr. Weisbart, airs on Monday, April 7. Check out further I.I.I. info on life insurance, annuities and long-term care insurance.Ã‚
With Super Tuesday underway, itÃ¢â‚¬â„¢s only appropriate we cite a new study showing that the American Dream is alive and well. The MetLife study finds that 86 percent of individuals believe the U.S. economy is headed in the wrong direction, up from 64 percent just one year ago. Despite this collective pessimism, 85 percent of individuals expect their own financial situation to be about the same or even better this year, compared to last year Ã¢â‚¬“ a sign that the American spirit of personal optimism and self-reliance is holding strong, MetLife says. Still, the findings reveal Americans have growing concerns about energy costs, healthcare costs, and rising levels of personal debt, as well as shrinking government-sponsored benefits.
In fact, more than three-quarters (77 percent) of Americans say they are planning to build their own personal safety nets to protect their familyÃ¢â‚¬â„¢s financial future. Exactly which products they think should comprise a personal financial safety net differ by generation. Health insurance that continues through retirement and retirement savings plans such as a 401(k) are the top priorities of both Baby Boomers and GenYers. But Boomers rank income annuities and long-term care insurance next, whereas GenYers would include life insurance followed by income annuities in their personal safety net. To help put your financial house in order the I.I.I. has free downloadable personal finance software. Check it out at http://www.myfinancialhouse.orgÃ‚
Demystifying the world of annuities — what they are and how they work — remains an ongoing challenge for our industry if the findings of the Employee Benefit Research GroupÃ¢â‚¬â„¢s 2007 Retirement Confidence Survey (RCS) are anything to go by. According to the RCS, just 11 percent of workers said they are very likely to purchase a financial product or select a retirement plan option that will pay them guaranteed income for life when they retire, while another 39 percent said they will be somewhat likely to do so. However, if the word Ã¢â‚¬Å“annuityÃ¢â‚¬ is included in the question the likelihood of purchase drops to 7 percent andÃ‚ 32 percent respectively. As the RCS notes, the likelihood of purchase appears to be lower when the word Ã¢â‚¬Å“annuityÃ¢â‚¬ is included in the question, as opposed to the phrase Ã¢â‚¬Å“income each month for the rest of your lifeÃ¢â‚¬ Ã¢â‚¬“ which is exactly what an income annuity provides. Check out the I.I.I.Ã¢â‚¬â„¢s annuities information and other annuity-related facts & stats.Ã‚ Ã‚