How Will Social Security Fixes Affect High Earners?

[The White Coat Investor]

I received this question via email:

As an idea for a future column would you think about going over how the various social security "fixes" such as increasing the limit above 118k would affect high income earners? And secondarily, what the youngest generation of physicians (I am 31) should expect from SS when planning our retirement? Am I right to assume that increasing my contributions should increase my benefit as well or am I delusional?

Here was my response:

Without a doubt, the worst thing that could happen to SS for high income earners is to make them pay SS tax on all earnings. That would raise your taxes by $15-100K per year. Would you get a little more SS benefit for it? Probably (depends on how the law is written) but it wouldn't be considered a good investment like it is for a low earner. The rest of the SS changes wouldn't really affect high earners much more than lower earners (except other forms of means-testing.)

I would assume that SS will be there for you in some form. It will likely look a little different when you get there but I think it is unlikely to go away completely. I expect something like $30K a year in today's dollars from SS. But whether that's $25K or $35K isn't going to ruin my financial plan.

What do you think about the other fixes? How would they affect your personal finances?

[SaintClive]

I'll take the bait on this one.  Really I think there are two really different conversations you can have about social security.  I like to refer to them as Bandaids and Overhauls.

 

Bandaids are a lot of the things people talk about when they say SS is underfunded.  Increasing taxable income; increasing the minimum age before disbursements; basically any move that either increases what's in the pot or decreases what goes out.  These are tweaks that are going to result in winners and losers - the losers tend to be high income workers and people who die early in life.  People can talk about these all day, but it always breaks down to simple math: you can't pull out out more than you've got in.

 

Overhauls are more interesting, though less likely to occur, especially in the near future.  I think there's a chance that fundamentally there may come a day that the defined benefit or pension type payments we have will be replaced by a defined contribution or IRA style retirement account which the federal government mandates a minimum contribution and offers a limited match.  Seem like a wild idea?  We already see this at the state level.  Underfunded teacher pensions in states like Kentucky have led to conversations about replacing the pension system with a 401(k)-like system for the state teachers.  There's been some pushback, naturally (most people prefer the guarantee of a pension to the risk of investments, especially at the interest rates some of these state pension systems are offering) but I think there's a strong chance that this ends up being the only sustainable fix for these pension systems.  Something coming to social security?  Probably a long way off and with a lot more pushback, but it makes for an interesting conversation.  I think for a lot of high income professionals who become educated in retirement investing, the idea of a defined contribution social security system wouldn't be so bad.

[Automatic]

High earners don't proportionally receive much additional bang for their buck by earning/contributing more over their lifetime. The social security calculation is very poor-friendly. Read this well written article to understand more about the calculations involved:

http://rootofgood.com/early-retirement-social-security/

 

[RetiredERdoc]

I think it is only a matter of time before the cap on the amount of ss taxes  withheld from income is either increased or completely eliminated. They have already done away with the file and suspend option, which was a good deal for all the docs that had a stay at home wife. I also think means testing will be coming.

[scbunker]

SaintClive wrote:

...a defined contribution or IRA style retirement account which the federal government mandates a minimum contribution and offers a limited match.

Click to expand...

That sounds like a much better system. Similar to some of the new "opt-out" 401(k) policies instead of "opt-in".

It feels less like welfare and more like responsibility.

[The White Coat Investor]

RetiredERdoc wrote:

I think it is only a matter of time before the cap on the amount of ss taxes  withheld from income is either increased or completely eliminated. They have already done away with the file and suspend option, which was a good deal for all the docs that had a stay at home wife. I also think means testing will be coming.

Click to expand...

Means testing is already here. It's a progressive system # 1, and # 2 the taxation on SS income is progressive too. That's means testing.

[The White Coat Investor]

Steven wrote:

SaintClive wrote:

…a defined contribution or IRA style retirement account which the federal government mandates a minimum contribution and offers a limited match. 

Click to expand…

That sounds like a much better system. Similar to some of the new “opt-out” 401(k) policies instead of “opt-in”.

It feels less like welfare and more like responsibility.

Click to expand...

I disagree. I think that's a worse system. Sure you and I could handle it. But most docs can't, much less the average person in society. SS is a safety net. No matter how stupid an investor you are, if you put in your 10 quarters, you get something out. There is A LOT of value to society in general to that system that would be lost in a 401(k) like system.