Your High-Net-Worth/Ultra-High-Net-Worth (HNW/UHNW) clients will soon be paying increased taxes to support a social program that is the largest and most popular in the U.S. - Social Security. But first, let’s take a quick look at how the U.S. Government spends all taxes paid by your clients and most Americans. [1] 

Federal Spending Is Divided Into Three Categories  [2]

1. Mandatory spending Is 60% to 65% of the Federal Budget. This money is allocated outside of the regular appropriations process because the Federal laws which authorized the programs specified who would qualify to receive benefits. The largest mandatory spending program is Social Security.
2. The most critical mandatory spending is actually in a separate category and that category is paying interest on the national debt. (8% of the Federal budget).
3. Discretionary spending:

• U.S. military and international security assistance take approximately 50% of all discretionary spending. In 2019, military expenditures amounted to 16% of the budget or $700 billion.
• The remainder of discretionary spending goes to fund the agencies of the government and their operations. [2]

 

Social Security Is Big and Getting Bigger

Funding Social Security in 2019 required 23% of the Federal budget or $1 trillion. As Baby Boomers continue to retire, this amount will go higher and higher every year. As of 2020, there are 56 million Americans who 65 or older. By 2035, there will be 78 million. [3]

More than 69 million Americans received Social Security benefits in 2019. Beneficiaries included retired workers, their spouses, disabled workers, and their dependents.

While four out of five Social Security recipients are retired, one-fifth of recipients are far younger. “Six percent of recent entrants to the labor force will die before reaching the full retirement age, and many more will become disabled.” [4]  On the death of a younger worker, Social Security benefits will continue for their surviving spouse and dependent children.

Thus, Social Security serves as both a life insurance policy and a disability policy for younger workers. While many in the younger generations don’t think they will ever receive anything from Social Security, it’s already paying out $14 billion a year to disabled young adults or the widows and children of deceased younger workers.      

Social Security taxes are presently calculated as follows:

“The current tax rate for social security is 6.2% for the employer and 6.2% for the employee, or 12.4% total.” [5]  Earned income subject to social security taxes is capped every year, and this is known as the  “wage base limit.”  This amount is adjusted upward every year by the Social Security Administration based on the National Average Wage Index, which measures annual growth in wages.[6] In 2020, earned income subject to Social Security tax was $137,700. In 2021, that figure will increase to $142,800.  

While the Social Security Trust Funds hold a surplus exceeding $3 trillion, the surplus will be spent by 2034. Hence, in the next few years, Congress plans to restructure this mammoth program to assure its solvency through 2100. [7] The plan which seems likely to be adopted will have all or most of the following elements:

When the restructuring goes into effect, Americans making over $400,000 a year will pay social security tax on the entire amount of their earned income. There will be no cap.  To avoid having the middle class and upper-middle-class hit with a large tax increase, the plan will create a “donut hole,” which will exempt income from the annual cap to $400,000. Over 25 years, there will be a small annual increase in the social security tax, which will rise from 12.4% to 14.8%, with you and your employer both paying half as you do now.

No one can predict what will happen with exactitude, and there are lots of different changes being proposed, but I think you will end up with the changes I mentioned above.

 

Resources: 

[1] https://www.cbo.gov/about/products/budget-economic-data#3

[2] https://www.cbpp.org/research/federal-budget/policy-basics-where-do-our-federal-tax-dollars-go

[3] https://www.ssa.gov/news/press/basicfact.html

[4] https://www.cbpp.org/research/social-security/policy-basics-top-ten-facts-about-social-security

[5] https://www.irs.gov/taxtopics/tc751        

[6] https://www.investopedia.com/terms/n/national-average-wage-index-nawi.asp

[7] https://larson.house.gov/social-security-2100

 

Copyright© 2020 Cannon Financial Institute - All Rights Reserved

Subscribe to Cannon Insights at http://www.cannonfinancial.com/newsletter/subscribe.

 

Contributing Writer: Subject Matter Expert Charles McCain