The Social Security debate has more questions than answers for Americans concerned they won’t be able to afford retirement.
The American Institute of Certified Public Accountants compiled an analysis of the state of the current Social Security system and explored the factors that should be taken into account for Social Security reform.
Rhode Island's Market Has Changed. Developers, Builders, Investors and Sellers Must Change With It.
By Emilio DiSpirito IV License Partner | Engel & Völkers Oceanside Leader | The DiSpirito…
Learn More
Patricia A. Thompson, a tax partner for Piccerelli, Gilstein & Company LLP of Providence, sits on the tax executive committee for the AICPA and reviewed the report before it was released.
“People need to understand when they’re making their own decisions, they need to think about whether or not there’s going to be any minimum Social Security they’re going to get,” Thompson said. “If they have personal accounts, they need to consider if they’ll have choices about participating, how much they’ll be able to contribute, how investment decisions will be made and if there will be any restrictions on how or when they can take money out.”
The AICPA has strongly recommended that the public and policy-makers gain an understanding of the issues included in reforming Social Security.
According to the report, the Social Security Administration’s “best guess” is that the Social Security trust fund surplus will peak in 2028 and then decline steadily until 2042, when the trust fund will be exhausted. Inadequate funds do not mean zero benefits – if no changes are made to the current Social Security system, beneficiaries could still receive their full benefits through 2042. After that, scheduled benefits would be reduced by 27 percent. By 2078, benefits would need to be decreased by 32 percent. It would take $3.54 trillion immediately to fund the so-called Social Security deficit. That money could come from a 1.9 percent increase in the payroll tax rate or by decreasing current benefits by 12.6 percent.
“What people need to remember is that Social Security was intended to reduce or eliminate poverty in the elderly group,” Thompson said. In the analysis, the AICPA found that Social Security accounts for half of the total income for almost 60 percent of beneficiaries. For 30 percent of recipients, Social Security benefits provide more than 90 percent of income. The poverty rate among the elderly would be 48 percent without Social Security.
Proposed changes to the system vary, but the most talked about change is the personal savings accounts within Social Security. Such a change, Thompson said, would change the system from pay-as-you-go to more like a defined contribution pension plan. The move would mean less redistribution of income from high to low income earners; from single individuals to married couples and from two-earner couples to one-earner couples.
“If you can’t redistribute income in that way – as it’s currently done – it seems that there would be a burden on other federal and state agencies because those (lower earners) won’t have enough money to live,” Thompson said. If the system switches to personal savings accounts within the system, the ability to shift money among income brackets vanishes – and the current system is designed to help the lower earning group.
Under a system of personal accounts, part of the payroll taxes paid by workers under 55 would be redirected from the Social Security trust fund to that worker’s own personal account. While account-holders would have to anticipate some restrictions on investment and payout options, they could expect to earn a higher return on their contributions that they would under the current system.
Adopting a personal account system would not eliminate traditional Social Security benefits altogether, but under most of the proposals the AICPA reviewed, those benefits would be reduced whether or not a worker decided to participate in a voluntary personal account.
Those choosing a personal account would also receive reduced traditional account benefits dependent upon how much they have redirected to the personal investment account. Large benefit offsets would make personal accounts less costly for the Social Security trust fund.
One possible downside of the personal accounts, the study shows, is that they may expose account-holders to uncertainty about their future benefit payouts.
Though people collecting benefits now have nothing to worry about, those under 55 may be affected by changes to the system, Thompson said.
“None of these proposals now tell you how the benefits will be reduced or at what ages – that information isn’t available,” Thompson said.
The analysis found there are four potential ways to restore fiscal balance to the fund: reducing benefits, increasing revenues, improving the rate of return on trust fund assets and other revenue sources like appropriating treasury general funds.
Thompson said reform discussions are still in the early stages.
