"Home lies in the things you carry with you everywhere and not in the things that tie you down."
-- Pico Iyer

Sunday, November 22, 2020

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.


gigi-hawaii said...

I agree with your post. We must not allow our SS benefits to disappear. SS must be strengthened.

Anonymous said...

Dear Tom and Friends, and punishing the wealthy (for studying and working each day) isn't a solution. Sincerely, po-cracker in PA!

Fred said...

I definitely support fixing SS funding for current and existing beneficiaries. Where I might deviate from a retiree's viewpoint is what to do if we cannot agree on a fix. Let the trust fund run out and all current and future retirees get the 20% haircut. That is fair. For far too long we have stolen from future generations to support existing retirees. Agree of or we all take the same bath. Personally I vote for fixing it immediately.

Barb said...

Surey you don't think it's the weatherwhos and work hard everyday. I can think of thousand of teachers, meducal workers and the like probably work much harder.

Barb said...

As someone who gets employee health insurance still, I haven't been able to deduct that in years...

Anonymous said...

Thanks for this post, which reminded me to call my accountant to discuss next year's taxes because I worked a bit in 2020 and earned more than I would have expected.

As for raising the social security for those earning more than $134,000, I think that should have been done long ago but would be happy enough to have it implemented now. The reasoning for decreasing the burden on those who have more has always escaped me.

Thanks also for your last post! I have had a sore throat, headache, body aches, etc. for the past couple of days, and it was comforting to know that someone else felt ill for no apparent reason. I wasn't afraid that I had COVID, simply because I haven't been anywhere except walks in the park so see no way to have contracted it.

Tom said...

Barb -- Thanks for your comment, but unless they've changed things recently, the govt. doesn't tax you on the amount the employer pays for your insurance; and also, the premium that gets taken out of your paycheck comes from the before-tax amount. In my own case, after I semi-retired, I could deduct my medical premiums from my Schedule C income. But now that I'm no longer working at all, I cannot deduct from SS, IRA or dividend income. On the other hand, Medicare is subsidized, so we retirees do get a break there. But ... I'm probably getting too technical. We shouldn't worry about these things too much!

Larry said...

You can include Medicare out of pocket costs in your itemized deductions: Any deductibles, out of pocket costs, and premiums for Part B, C, D, and Medigap. However, that's just if you itemize deductions, which is a lot less do-able these days with income limits, the higher standard deduction, and all medical deductions having to exceed 10% of your income.

Rebecca Olkowski said...

I depend on it. SAd it's such a paltry increase especially when people need it the most.

DJan said...

I have been drawing Social Security benefits for more than a decade. I don't know what I would have done without it. It's more than an "entitlement," it's a critical piece of legislation,

Olga said...

Way back when I started my teaching career, one of the first orientation meetings we had was with a representative who urged us to newbies to start contributing to the teacher pension plan even though SS was automatically taken out of our paychecks. I remember the talk of a three legged stool -- social security, the school's pension plan and personal savings. I was 21 and it was very hard to even imagine retirement but it really was good advice.

Olga said...

That was to say I don't think I was greedy, just worked hard and tried to be prudent in my life.

ain't for city gals said...

With all due respect, every time I read a post like this I think I should be so lucky to be having these problems. If you think about it someone making minimum wage is still making approximately $25,000 a year.

Sue said...

Dear DJan, seems to me, people who call social security an "entitlement," are the ones who opted out of paying into it.

Tom at Sightings said...

Olga -- You are so right. I remember taking a job when I was 30 with a old-line company that offered "great benefits." I didn't care about the benefits. I said to myself, Gimme the money! But 20 years later that stodgy old retirement plan saved my life.

Ain't for city gals ... I agree, it's tough to survive on $25k a year, certainly in the Northeast where I live and probably in Arizona too. And those of us on Social Security are lucky -- as someone once said, It's okay to be young and poor, but you don't want to be old and poor.

Wisewebwoman said...

In comparison, I, single elder woman,live on $5,000 below the official annual poverty line in Canada but my health care and medications (hugely significant) are all covered apart from a small dispensing fee from the pharmacy with a small extraction from my savings to make ends meet.

I've been fighting for a quite a while to get this increased to at least the poverty level but with Covid this has all stopped and we are all getting older and more challenged as time goes by.


Anonymous said...

Large corporations and the wealthy elite do the lobbying and control most Congressmen’s voting. In spite of years of warnings from the GAO, Congress will do nothing….just like they have done for the last 2-3 decades. Uncle Sam will just add to the national debt until the system fails. Fortunately, this will only happen if the world markets are able to discipline us by curtailing our borrowing through extremely high interest rates. Current Federal debt is $23.3 trillion. Federal debt is projected to be $36.2 trillion by 2030. The total net worth of all USA billionaires is $3.4 trillion. In other words, if we take every nickel of every billionaire….it would hardly make a dent. One thing is for sure….higher taxes are coming for everyone. Term limits might help smarter decision making.

Arkansas Patti said...

Seems the good news is also the bad news here. I make under $25,000 so I don't pay taxes but the bad news is that I make under $25,000. Fortunately my car and house are paid for or it would be a struggle.

Plynjyn said...

In the early years of Social Security, if you paid the maximum amount in, which very few did, you would receive every penny back in 19 months, less than 2 years. My exMIL lived to be 104, so she received monthly checks covered by us Baby Boomers’s paycheck deductions for 40 years. Now, us Baby Boomers are told we will never receive back all of our contributions, and that the amount we do receive will be cut in less than 15 years. I agree that they need to address this scary situation in the Biden administration.

Janis @ RetirementallyChallenged said...

My husband and I just received the same SS email but I haven't opened it yet so thanks for the heads up. The government has been talking about the SS "problem" for as long as I can remember but they haven't the backbone to do anything except to kick the can down the road. When my husband and I started to seriously plan for our retirement, we ignored future SS income. Now, I'm glad we did since it is even iffier today. Our plan is to wait until we are 70 before we start collecting. I wonder if anything will be there. Shame on the many, many years of both republicans and democrats who refused to make the hard decisions.

Anonymous said...

Actually, the answers ARE easy.

Either raise taxes or cut spending.

The problem YOU have is that after President-elect takes office the Democrats will be blamed for whatever they do. No more easy out for
you and your fellow far-leftists, 'Orange Man Bad!'.

Kay said...

Working as an Illinois teacher within our own retirement system, we were not able to take part in Social Security when I was teaching. Darn! Now they can.

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