Younger workers are concerned that social security will no longer be available for them when they retire. They fear that they have been paying into the system for years, but there will be nothing left when they retire. Social Security Trustees released their annual report in April 2020, and stated there is a possibility that social security could be insolvent in 15 years. The current COVID-19 pandemic is likely also depleting reserves.

Social security is paid out of a general fund; the treasury reserve has a provision for social security. For public optics, nobody in Congress or the White House wants to preside over social security payments disappearing, or social security going away. Therefore, social security will likely never disappear completely. Although young workers will probably still receive social security payments, their payments will significantly less than what current and past recipients are receiving. In the case of Medicare’s Part A, a Trust Fund provides the funding for that. That is not covered by the general fund, and this Trust Fund is expected to run out in around 2024, give or take a couple of years. Medicare and its Trust Fund is a topic for a future blog article.

The challenge of funding social security remains. One provision that helps and will continue to help is the taxation treatment of social security. Around 30% of Social Security recipients pay tax on their social security payments. They either taxed on 50% or 85% of their social security benefits. The income thresholds to determine your taxability of social security are low and have stayed the same for over two decades. Keeping these the constant is intentional, and has helped to raise revenues in order to continue the funding of social security.

  • You pay tax on 50% of your social security benefits if you file your taxes as single and your combined income is between $25,000 and $34,000. If you file as married filing jointly, and your combined income is between $32,000 and $44,000, 50% of your social security benefit is taxable. 

  • You pay tax on 85% of your social security benefit if you filed your taxes as single and your combined income is more than $34,000. If you filed your taxes as married filing jointly and your combined income is more than $44,000, 85% of your social security benefits is taxable.

Combined income is your adjusted gross income (AGI) plus nontaxable interest (for example, municipal bond interest) plus half of your social security benefits.

Another decision that has helped to save on costs is the elimination of social security strategies such as file-and-suspend and restricted application. The Bipartisan Budget Act of 2015 eliminated these strategies effective April 30, 2016. A relatively small percentage of recipients utilized these choices. These two strategies reduced available reserves. The federal government also saw these strategies as an unintended loophole and therefore chose to eliminate it. This elimination has also simplified the available choices for taking social security.

In 1997, Congress thought about young workers and their retirement future. Pensions are slowly disappearing, and it is relatively rare for a young employee to get a pension from an employer. Therefore, via the Taxpayer Relief Act of 1997, Congress passed the creation of the Roth IRA. This particular IRA is advantageous for a young investor. A young investor is not at his/her earnings peak, and consequently will not be in a top or higher tax bracket. You contribute after tax income into a Roth IRA. The contribution must be earned income. The appeal of the Roth IRA is that when you take funds out of the Roth account, all of the proceeds are tax and penalty free, with one condition. The condition is that the account has to be open for at least 5 years and you have to be at least age 59 ½. This article will not cover the tax or penalty exempt withdrawals form a Roth IRA. Note that all contributions, which are all after-tax, are available tax and penalty free.

Social security will likely exist in the future. However, one should expect a noticeably smaller payment than what current and past recipients receive or have received.  Per a recent Social Security Trustees’ report, future recipients can expect a 21% benefit cut that can grow to 27%. Current new recipients are likely to experience a reduction in future payments if they live long enough (at least around age 84). In conclusion, maximizing savings by contributing as much as possible to a 401(k)/403(b) account, an IRA, and also even a taxable account is imperative for a future in which social security will be a smaller component of an individual’s future retirement resources.

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This document is for educational and informational purposes only and does not constitute an advertisement or solicitation of any securities or investment services provided Mainstay Capital Management, LLC (“MCM”). This document should not be construed as investment, tax, or legal advice, or a solicitation, or a recommendation to engage in any specific strategy. MCM is an independent investment adviser registered with U.S. Securities and Exchange Commis-sion. MCM specializes in workplace savings plan portfolio management and retirement planning advice for active employees and retirees. This document was prepared by MCM primarily based on data collected and analyzed by MCM. The opinions expressed herein are those of MCM alone and are for background purposes only. MCM does not purport the analysis to be full or complete or to constitute investment advice and should not be relied on. In addition, certain information contained herein or utilized to draw the conclusions contained herein has been provided by, or obtained from, third party sources. While MCM believes that such sources are reliable, it cannot guarantee the accuracy of any such information and does not represent that such information is accurate or complete. All materials and information are provided “as is” without any express or implied warranties by MCM. MCM charges its fee based on a percentage of assets under management, which creates an incentive and conflict of interest to increase assets in that account. Furthermore, MCM has two different fee schedules, and therefore has a conflict of interest when assets or accounts move from the lower fee schedule to the higher fee schedule. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Consult your financial professional before making any investment decision. Please see MCM’s Form ADV Part 2A and Form CRS for additional information.

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