Social Security is the focal point for the debate on U.S. entitlement spending, and the threats to its future are well-known. Without reform, the Social Security Trust Fund will run out of revenue in 2033, and that point, revenue from Social Security payroll taxes will pay only three-quarters of scheduled benefits.
To fill that potential shortfall, various policymakers and interest groups have proposed several solutions. Each has its pros and cons and would have different effects on various people. Let's take a closer look at some of the most popular proposed fixes and how they'll affect you and your retirement, based on projections from Social Security's chief actuary.
Fix 1: Raise the retirement age.
Raising the retirement age will reduce the number of people eligible for full benefits and cut the amount that those taking Social Security early will receive. Many people don't realize that the retirement age has already been raised, with the normal retirement age to reach 67 for those born in 1960 or later. Further proposals include further raises to between 68 and 70, or indexing the retirement age to match rising life expectancies.
Raising the retirement age would have a big long-term impact on Social Security's viability. But most of the proposals affect only retirees who are currently 10 or more years away from being eligible even for early Social Security benefits, so they do little to slow the immediate decline in Social Security's Trust Fund balance and by themselves wouldn't eliminate the funding gap until decades into the future. These proposals put the burden of supporting current retirees and near-retirees on younger workers who'll have to defer getting benefits.
Fix 2: Raise the amount of payroll taxes collected.
Proposals to raise tax collection focus either on the rate of tax or the amount of wages subject to tax. Right now, employees pay 6.2% of their wages on Social Security taxes, with employers adding 6.2% of their own. According to Social Security, raising those tax rates to 7.65% would close the funding gap and keep the trust fund solvent. Alternatively, eliminating the current maximum of $113,700 on which taxes are collected would keep Social Security solvent until 2078.
Clearly, these proposals have much different effects. Eliminating the wage-base maximum puts the entire burden of higher taxes on high-income individuals, while raising tax rates would solely hit those with incomes under the wage-base maximum. It'd take a combination of these proposals to spread the burden across those of all income levels.
Fix 3: Use means-testing for benefits.
Means-testing involves reducing benefits for those with substantial income from other sources. According to one estimate, phasing out benefits for those with other income of more than $55,000 and cutting them entirely for above $110,000 would eliminate a fifth of the funding gap.
The challenge is figuring out where to draw the income line. Draw it too high, and the provision does little good because it captures relatively few people. Draw it too low, and you'll hit a larger number of recipients of more modest means.
Fix 4: Change the way benefits are calculated.
A lot of attention lately has centered on cost-of-living adjustments for Social Security. Solutions such as using the chained CPI or arbitrarily reducing inflation adjustments have been proposed repeatedly. Others target specific benefit reductions for new and future retirees.
By themselves, these proposals take a long time to have a material impact on Social Security solvency. Cost-of-living-based adjustments would have an immediate impact on retiree benefits, forcing current recipients to bear much of the immediate burden by accepting smaller annual benefit increases, while other proposals tend to put the burden on those not currently receiving benefits.
Fix 5: Change the way benefits are taxed.
Right now, Social Security benefits are subject to tax only for those earning above certain threshold amounts. Up to 85% of benefits get taxed. One proposal would apply private-pension rules to Social Security, making benefits entirely taxable.
Changing benefit taxation would have only a minimal impact on the funding gap but potentially hit low-income taxpayers with higher tax bills. Even higher-income retirees would face a small increase in taxable income, and with their higher tax rates, they'd see significant tax increases as well.
Fix 6: Change benefits for spouses and other family members.
Under current law, spouses are entitled to benefits equal to half the other spouse's benefit. One proposal targets that benefit, cutting it to a third over time.
The funding impact of reducing spousal benefits is fairly insignificant, perhaps reflecting the rising trend toward two-income families where both spouses would claim benefits based on their own work histories. Larger impacts would occur with more extreme proposals, such as curbing survivors' benefits for spouses.
A tough set of trade-offs
Social Security has become the focal point of entitlement debate precisely because it's so easy to find different ways to try to address its funding problems. But with so many proposals affecting people differently, it'll be hard to come up with a true consensus on how to address looming benefit cuts in the decades to come.
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