Social Security changes post preceeded by LRPC's Plan Sponsor Insight image.

Are Social Security changes likely soon? I think so. Recently, six members of the House of Representatives, led by Representative Reid Ribble (R – WI), introduced the Save Our Social Security Act (also known as the S.O.S. Act). Key provisions of the Act, with my thoughts, are outlined below. Although the Act may not pass in the near future, it begins to set the template for Social Security changes which will be required to keep Social Security afloat.

A higher Social Security wage base

A significant provision of the Act is the proposal to expand the maximum wage base Social Security taxes are applied to. In annual increases from now until 2020, the Act would nearly double the maximum compensation subject to Social Security taxation.

This is by far the easiest and most commonly proposed of all Social Security changes. It continues to baffle me why Social Security taxes have a wage base limit at all. In the search for new revenues to fund Social Security, this is low hanging fruit.

Delayed full retirement age

The Act proposes moving the age at which recipients can collect a full Social Security retirement benefit from 67 to 69. Reduced benefits will still be collectible at earlier ages, including age 62. Discussed for many years, this is another easy to understand fix. Many Social Security experts believe that the full benefit age needs to be increased soon for demographic as well as financial reasons. Americans are living longer and enjoying better health. As a result, we will all probably need to work longer.

COLA change

A change in the method used to calculate cost of living adjustment (COLA) increases from CPI-W to C-CPI-U. No surprise, the new method is expected to result in lower COLA increases. A minor adjustment overall and one likely to cause very little pain to existing as well as future recipients.

Other potential Social Security changes

The S.O.S. Act charts a course of least resistance in the Social Security changes it proposes to keep Social Security solvent. If these changes don’t result in a meaningful improvement in Social Security’s funding outlook, the following more painful changes may be in the offing:

  • Means testing. Most government benefits are subject to some sort of means testing formula to ensure that they are only received by those who truly need them. Social Security benefits are still collectible by all Americans with an eligible work history, regardless of their compensation in retirement. Subjecting Social Security applicants to some sort of means testing seems reasonable and overdue.
  • Increases to the payroll tax. It is probably just a matter of time until the payroll tax percentage itself will be increased. This adjustment is most painful to all, businesses as well as individuals.
  • Longevity indexing. Since we all can expect to live longer than prior generations, at some point in time it will probably make sense to adjust the benefit we earn through Social Security to that longer life expectancy. The result will be a smaller monthly benefit.
  • Incentives to keep working. Most of the proposals for change are of the “stick” variety as opposed to the “carrot”. Many experts believe that Social Security taxes should not be deducted from older Americans (e.g.; those age 65 and older) who choose to work to incent them to continue working.

In every employee education session I lead there is at least one employee who asks whether I think Social Security will be around long enough for him/her to collect. My answer has always been the same — worry about something else, Social Security will be there for you! There is nothing I can think of that Americans across all political beliefs, races and genders agree upon more uniformly than the expectation of receiving their Social Security retirement benefits. As a result, I believe our elected representatives will do everything possible to ensure that Social Security is there for us to collect.

________________

About the Author

Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. He has consulted with many Fortune 500 companies, including: Aon Hewitt, Apple Inc., AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Car Company, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or bob@lawtonrpc.com.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Advisory (RIA) firm providing investment advisory, fiduciary compliance, employee education, vendor management and plan design services to 401(k) plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at: http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.