5 changes to expect in Social Security

Recently, financial economist Larry Kotlikoff stated that in order to ensure the long-term solvency of Social Security, either "an immediate and permanent 32% hike in the Social Security payroll tax rate (from 12.4% to 16.4%, forever) is needed to pay existing benefits" or "an immediate and permanent 23% cut in all OASDI benefits" needs to occur.

I have had the pleasure of leading employee education meetings for more than 25 years. One concern that is always brought up during these sessions is Social Security: it seems that most people don't believe that Social Security will be there when it is time for them to collect. Unfortunately, it is statements like the one Mr. Kotlikoff made that cause most people to worry about their Social Security retirement benefits.

For 25 years I have shared the same advice: "Don't worry, you will be able to collect your Social Security benefit." I would provide the same advice today, with one caveat. Social Security may look different than you imagine. Expect to see these changes in the coming years:

• Raising the Social Security retirement age. This will happen to those further away from collecting benefits. It has to. We are all living longer. Expect full and partial benefit collection ages to be moved back three to five years.

• Means testing. This is so logical it’s hard to understand why it isn't being done already. Those individuals fortunate enough to generate a significant amount of income during their retirement years will not be eligible to collect a Social Security benefit. Remember, the Social Security program was started as a safety net and was not meant to be an integral part of every American's retirement program.

• Incentives to continue working. Most experts agree that the majority of baby boomer retirees will need to work during their retirements. We just haven't saved enough. Eliminating the Social Security payroll tax of 12.4% for older workers and removing the earnings test for early retirees are two changes likely to be made.

• Longevity indexing. Since we are all living longer, adjusting our Social Security benefits to account for our longer life spans is an idea likely to gain traction. Longevity indexing is a nice way of saying that monthly benefits will probably be lower for all of us.

• Adjustments to the payroll tax. There are employer- and employee-paid components of the Social Security payroll tax. There is also a limit on the amount of compensation taxed. Eliminating the compensation cap and/or increasing the rate are adjustments that may be made. This could mean less take home pay for many during their earning years.

Social Security will be there for your workers when they retire. However, it is likely that most of them will need to re-calculate the impact our Social Security benefit will have on their retirement.
Robert C. Lawton is President of Lawton Retirement Plan Consultants, LLC (lawtonrpc.com), an RIA firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. He may be contacted at bob@lawtonrpc.com or 414.828.4015.