The 1.3% Solution

     I just got an email from Social Security notifying me there is a message for me on My Social Security. I signed up for the online account a couple of years ago, and now all my records are available on the website. B has not opened a My Social Security account. She still gets her information on paper, in the mail, which will probably arrive sometime next week.

     The message included a statement of my new benefit amount for 2021, before deductions, with a list of deductions for Medicare and taxes, and then the amount to be deposited in my bank account. Why, it's just like getting a paycheck! There's your gross salary, then all the  deductions, then your take-home pay, which is a whole lot less than your salary.

     Social Security benefit is going up by a paltry 1.3% for next year. The basic premium for Medicare Part B is going up by 2.7%, from $144.60 to $148.60. So our take-home will be something less than a 1.3% increase. Then if your income is above $88,000 for an individual, or $176,000 for a couple, you pay a surcharge, and that's going up, too. Or ... what Social Security giveth, Medicare taketh away.

     The threshold for being taxed on Social Security benefits is not going up. It remains at $25,000 for an individual and $32,000 for a couple. Anything above that is subject to federal income tax.

     These tax limits were set in 1985, back when you could live on $25,000 a year. If the limits had been adjusted for inflation, Social Security beneficiaries would only begin to pay tax starting at $60,500 for an individual and $77,400 for a couple. And so today, what Social Security giveth, the IRS taketh away.

     For comparison, in 1985 the premium for Medicare Part B was $15.50, not $148.60. However, there was no Part D to cover drug costs back in 1985. So that's definitely an improvement.

     Another point to consider. When you get health insurance through an employer your premiums are tax deductible. When you pay them on your own, such as through Medicare, they are not tax deductible -- making them more expensive.

    We may complain about the small increase in benefits -- that may actually prove a decrease for some people because of higher Medicare costs. Still, as we all know -- but don't always appreciate -- Social Security is a vital financial asset for retired Americans. What makes the asset so valuable? For one thing, the value of Social Security does not gyrate up and down like an IRA or 401K that's invested in the stock market. For another, as paltry as a 1.3% increase is, it's still a better rate than what you'd get from, say, a 10-year government bond which pays an even more paltry 0.8%.

     A bond is not exactly the same thing as Social Security, but it provides a relevant point of comparison. The bond rate determines the rate for an annuity. According to Jeff Sommer in the New York Times, the average 65-year-old man receives a Social Security benefit of $1,375 per month. An annuity paying him that much would cost almost half a million dollars. So that $1,375 per month is the equivalent of a half-million-dollar asset.

     There's one problem with Social Security. The system pays out more than it takes in via taxes -- a problem made worse by Covid, which has thrown a lot of people out of work, which means they are not contributing payroll taxes. The Social Security trust fund is projected to run out of money in less than 15 years. If nothing is done, benefits would be cut by more than 20%.

     We all assume that something will be done to shore up the system. But who knows what it might be. Some people suggest raising the retirement age to 68 or 70. Others want to raise the payroll tax, currently at 12.4% (half paid by the employer, half by the employee).

     Currently the tax only applies to incomes up to $137,700. President-elect Joe Biden has proposed adding the payroll tax to income above $400,000. That would raise some extra money. However, it would create a donut hole for incomes between $137,700 and $400,000, which some people might consider unfair. But more importantly, applying the payroll tax to income over $400,000 would only close about half of the deficit. 

     And Biden is also talking about expanding benefits by setting higher cost-of-living adjustments and increasing benefits to lower income retirees and to widows and widowers. Who would argue against giving poor people more money? But wouldn't it just make the Social Security funding problem worse? 

     It seems there are no easy answers. But there's one thing we'd all agree on: Social Security must be preserved and if anything, strengthened.