Two Ways to Save Social Security

Two Ways to Save Social Security

Written by: Grace Kvantas

It’s likely that at some point in the past you have seen the headlines and heard the conversations about Social Security running out of funds or going bankrupt. 

You may have wondered, Will I ever receive my Social Security benefits that I’ve paid so much for over my working years? 

The Social Security reserves are indeed growing lower over time and without any changes could eventually run out.  One obvious way to help the issue would be to reduce Social Security benefits, but that solution is one that many people are opposed to and one that not many politicians would support.  Fortunately, as listed in this article on CNBC, there are two simple solutions that could help keep Social Security around for the long haul.

1. Gradually increase the Social Security payroll tax.
 

The Social Security payroll tax rate is currently 6.2% for an employee, with a matched 6.2% also being paid by one’s employer, for a total of 12.4% of a worker’s salary being paid into Social Security each year.  One proposed strategy is to increase this amount by .2% per year for 10 years, increasing it to 8.2% for both employee and employer in that time span.

2. Tax all wage income.
 

Currently only the first $127,200 of taxable income is taxable for Social Security.  This is called the Social Security wage base, and it increases most years with inflation.  According to the article, “Eliminating this taxable wage cap altogether would add 1.1% of GDP to Social Security’s revenue, bringing the total addition to 1.7% when combined with the higher payroll tax mentioned previously.”  Of course, if the income that’s taxable for Social Security is increased, those paying high amounts into Social Security will want the maximum Social Security benefits increased as well, but that may or may not happen.  The current maximum Social Security benefit at full retirement age is $2,687 per month.

Related: How Tax Reform May Impact You

Overall the Social Security program benefits many citizens and is something that most would like to keep around.  Therefore, at some point changes will be implemented that will preserve the program, and over time we will see how it will unfold.  Perhaps it will be one or both changes listed above.

When it comes to planning for your personal retirement, it’s important to consider Social Security benefits yet not rely too heavily on them.  You’re better off having a good plan in place to be adequately prepared on your own than losing sleep over the what-ifs of Social Security.  It’s also beneficial to consult a qualified financial advisor to help you evaluate the ways you can maximize your Social Security benefits while keeping tax implications in consideration when deciding when to draw your benefits.

Chad Smith
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Chad has spent the last fifteen years helping people discover how they can spend more time on things they enjoy.  He is a Certified Financial Planner (CFP®) an ... Click for full bio

Do Valuations Matter?

Do Valuations Matter?

Written by: David Lebovitz

The S&P 500 has had an impressive start to the year, rising over 4% year-to-date with only three days of negative performance.


However, as the equity market has moved higher, investors have become increasingly concerned about valuation. While it is difficult to ignore the fact that the S&P 500 forward P/E ratio currently sits at 18.5x, well above its 25-year average of 16.0x, we believe elevated valuations may be justified for three reasons. First, 2018 earnings growth is expected to come in around 15%, suggesting investors will be compensated for paying a higher price, and second, inflation and interest rates are both below their long-term averages. In an environment of low rates, low inflation, and healthy earnings, perhaps it is appropriate for stock market valuations to be above average?

Finally, valuation is not a great predictor of short-term returns. As we show on page 6 of the Guide to the Markets, valuation tells you very little about what will happen over the next year, but a decent amount about what to expect over the next five years. For those who are still skeptical about equities given current valuations, it is important to remember that bull markets tend to go out with a bang, rising by an average of 26% during their final 12 months. This makes sitting on the sidelines expensive, particularly in a world of low interest rates.

Related: Will Companies Reinvest or Repurchase Due to Tax Reform?

So are valuations concerning? They have our attention, but we remain cautiously optimistic that equities can continue to push higher. However, late cycle markets require a more nuanced approach to investing, meaning active management will be essential. As such, we continue to see opportunity in the more value-oriented sectors of the market, with energy and financials being two of our favorite ideas.

Low inflation and yields can support higher multiples
 

Z-score

 

Related: Will Companies Reinvest or Repurchase Due to Tax Reform?

Learn more about alternative beta and our ETF capabilities here.


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