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How These 6 Social Security Fixes Will Affect You

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.

Source: Wikimedia Commons.

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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Comments from our Foolish Readers

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  • Report this Comment On April 13, 2013, at 1:04 PM, picker1000 wrote:

    Eliminating the limit is the best way to close the financial gap. The high earners could afford the most of this burden rather than the employer or the employee being saddled with the higher rates for the lower income workers. However, the limit must remain for the employer, else the cost of business will rise translate to higher product costs and inflationary trends.

  • Report this Comment On April 13, 2013, at 1:08 PM, pbrub90 wrote:

    Here's how you fix Social Security....have the government pay back what they stole from the SS account.

  • Report this Comment On April 13, 2013, at 1:09 PM, raoul116 wrote:

    Picker1000 - RIGHT on! And THAT'S the one thing they NEVER mention because they will protect the super rich no matter what. You may already know this but if they simply took off the earnings cap they could actually LOWER the retirement age to 55-58, with FULL benefits! And, they could increase benefit amounts for all seniors now collecting by 20-30% which would move millions out of the poverty level. Lastly, by lowering the retirement age, increasing benefit amounts - MILLIONS more Americans would retire which would free up MILLIONS of jobs for those still unemployed or underemployed. But, of course, this takes courage - something BOTH parties lack.

  • Report this Comment On April 13, 2013, at 1:09 PM, pbrub90 wrote:

    And quit calling it an entitlement...it isn't, we paid for it...I worked 45 years for my SS check and I want it in full.

  • Report this Comment On April 13, 2013, at 1:17 PM, 1glock wrote:

    I agree, it's NOT an entitlement……Our government does owe a substantial amount to the coffers of SS. Pay up!! And how about expanding the base……do senators and reps pay in?

  • Report this Comment On April 13, 2013, at 1:47 PM, senorakaren wrote:

    Most fair way to "fix" is to eliminate/raise the maximum.

    We are "entitled" to S.S. because we contributed the required monies for many years. I would suggest using different terminology such as "Social Security Retirement Insurance"

  • Report this Comment On April 13, 2013, at 1:51 PM, lm1b2 wrote:

    The Only SS Fixes i want to see is a permanent solution to fully funding both SS,and Medicare.Congress in effect used our money like it was normal tax revenue,it was stolen without our permission,they have a obligation to restore it on a permanent basis.Instead these idiots are trying to find ways to cut it,let them cut there retirement benefits,leave ours alone,and restore it!

  • Report this Comment On April 13, 2013, at 1:57 PM, bobthegoodone wrote:

    Why not take those who have never paid in a dime off SS ? Why is SS being used as a welfare program ? How many border babies do we now have on it ? How many immigrants from other countries are now on it ?

  • Report this Comment On April 13, 2013, at 2:10 PM, IngaBinga wrote:

    Some people don't seem to know what an "entitlement" is. Social Security is an entitlement. You paid into it while you were working so you're entitled to benefits after you retire. Thats an entitlement.

  • Report this Comment On April 13, 2013, at 2:26 PM, alma223 wrote:

    Or - they could tax INVESTMENT income as a payroll tax which would bring in loads of cash. Even a small tax, say 4% on ALL investment income would have a spectacular affect. This income is excluded from payroll taxes as it isn't considered "earned" income.

  • Report this Comment On April 13, 2013, at 2:35 PM, winkydude wrote:

    Get rid of the cap, to the folks earning over the current limit this would mean very little to them. They should end up being able to draw more when they retire. Were talking about money you and i and our employers pay into a system that has nothing to do with the government other than the fact that we blindly let them manage it. Another good idea would be to take it away from government and give it to a private management group who could invest it( not all of it) but part of it looking to make a profit return for us. During this transfer to the new management group they could do a full audit of the account the government has been carrying. Wouldn't you like to know where the money went? Bet if the government paid back all the money they been "borrowing" you would see there is no solvency problem. It's a "greed" problem, they don't want to pay it back!

  • Report this Comment On April 13, 2013, at 3:00 PM, mbuz628 wrote:

    I am so tired of hearing how this party or that party put us in this situation! The truth is, people have put us in this situation. I personally know people who have claimed bogus kids on their tax returns and have received upward of $6000 back at the mere age of 17. Why has this not been caught or red flagged, I'll wh never knnow. Let me file one illegal thing and I'd be caught sure as God lives. Some members of the same family who earn (so they brag) make $8000 a week with their own businesses (in someone else's name) and applied for food stamps and got $459 a month!!!! So many on disability when no disability is truly there... why not hire "invesigators" to and stop these people who are abusing our systems! Its not just government .... its our everyday Americans who are also using up the funding many of us have paid for all our lives and will not be there when we are in need!!!!! GRRRRRRRRR

  • Report this Comment On April 13, 2013, at 3:23 PM, awolfbeme wrote:

    great idea!!! how about they pay the money back they have stolen from it through the years.better also the congressman and senators and presidents and vices all have to put all pension and payroll money back into it.as they all have been aiding an abetting this big ponzzie scam through all these years.if our goverment wasn't so currupt they'd all be in jail by now

  • Report this Comment On April 13, 2013, at 3:26 PM, GG57jj wrote:

    The govt. should have to pay back all the money they took. Second, give us all what we paid into it and that is that. I did not work hard all my life to have someone in Washington tell me what i should live on with the money i saved. I want to see them do that. We are not socialist and we are not all equal.. Sorry but that is the way it is, if you work hard and save you are entitled to get the money. If you sat on your butt and did nothing then you will have to live on alot less.. The rich can not pay for everything.. They worked for their money also.. quit being so lazy and expecting them to foot your bill.. Get off your butt and work, 2 jobs if you have to.. I did for 20 years while going to school. If i can do it so can you,.

  • Report this Comment On April 13, 2013, at 3:27 PM, GG57jj wrote:

    Also, All illegal should be shipped back to where ever they are from.. no money to them at all.. Why cant we do it by the law.. why is Obama letting them get away with illegal things... oh, Obama does illegal things and gets away with it.. I forgot.. HITLER

  • Report this Comment On April 13, 2013, at 3:37 PM, Saveditup wrote:

    Almost all of the solutions simply penalize those people who have been responsible and saved for their retirement.

    Also, I think it is fine to raise the income limit, as long as there is a corresponding increase in the maximum benefit.

    Currently, higher wage earners already get less for their contribution.

    Why continue to penalize them?

  • Report this Comment On April 13, 2013, at 3:39 PM, Pattielaine wrote:

    The so called chained CPI is the most stupidest one of them all. Yearly increases, if any some years, are usually about 1%. So now recipients have to wait a whole year to get .50% increase. For the indigent who make only $900 a year, that like getting $4.00 instead of a whopping $9.00 a year. How about garnishing George Bush's and Dick Cheney's whole yearly income until they die. They started the war and should be the first to pay for the war.

  • Report this Comment On April 13, 2013, at 3:41 PM, Saveditup wrote:

    How do these people know if a $150,000 earner could afford more taxes? I think they pay enough taxes already.

    It is easy to say remove the maximum if you do not earn that much.

    Lets just take from others! That always works

  • Report this Comment On April 13, 2013, at 3:51 PM, greyhound44 wrote:

    The Congressional Research Service recently concluded that if the Social Security "Caps" (Tax Wage Base) were eliminated that the SS "Trust Fund" would be solvent for 70 years WITHOUT an increase in TAX RATES, NOR a Reduction in BENEFITS!!!!

    A simple NO BRAINER!!!!!!!!!

  • Report this Comment On April 13, 2013, at 3:55 PM, greyhound44 wrote:

    FD: I paid MAX FICA for 35 + years and retired at age 58 3/4; took MAX SS (reduced for age) retirement benefits at 62, and MC at 65.

    ret expat MD (since 2003)

  • Report this Comment On April 13, 2013, at 4:04 PM, JustPlainTired wrote:

    If they raise the retirement age high enough no one will live to collect.

  • Report this Comment On April 13, 2013, at 4:15 PM, sudoka12 wrote:

    That money belong to the people that worked 4 it stop paying these employee high salary/giving to do nothing and giving to younger generation that have not worked to put any thing in to get any thing out we nee a change in the system.

  • Report this Comment On April 13, 2013, at 5:08 PM, casimcea wrote:

    There are two components to any budget; revenues and expenditures.

    Social Security

    On the revenue side there is the SS payroll tax,

    On expenditure payments to retirees.

    Defense

    Arms sales revenues 66 billions

    Expenditures 500+ billions

    Foreign aid

    Expenditure 50 billions

    Income?

    The list is endless. The point is that SS IS a entitlement. It is the right word for it. It is a contractual obligation, unlike most of other government expenditures.

  • Report this Comment On April 13, 2013, at 5:18 PM, smith3459 wrote:

    I wish people would stop with the statements saying that the government stole the money and that "paying it back" would solve things.

    First, they invested the money in US securities, long considered the safest investment in the world. What would you have ad them do with the money, put it under a mattress in the Lincoln bedroom? Or maybe they should have invested it with Bernie Madoff.

    Second, the projections about SS insolvency take into account the return of those investments in securities. The government fully intends to pay it back.

    Last, all of you "soak the rich" people are dead wrong. Social Security is a program intended to be funded by the beneficiaries with a proportional return to those beneficiaries. You want to make it a welfare program. We have enough of those. Not to say there are not lots of people getting back way more then they ever paid in. But soaking the rich so that the middle class get way more then they paid in is just plain welfare.

  • Report this Comment On April 13, 2013, at 5:20 PM, Freddbe wrote:

    The biggest problem with Social Security is if one person works and paid into it , it covers the whole family. Everyone is covered. Which is good but if that one person gets kill, you got a spouse plus one kid or 30 kids it pays. If one kid gets on disable ,then gets married she or he is collecting and if they have 30 more kids the more checks keep coming in. Then they it isn't enough to support themselves so here comes the food stamps and medicaid. Look out your window no one goes to work and it isn't just welfare and no jobs, it is Social Security being abuse as much. A working man tried to get disability , one leg and one eye and got problems getting help. The problem is in the system , fix it don't remove it or kill it. it does work and can do what it is suppose at a reasonable rate. people just don't know how abused the system is. A doctor got as much power as a lawyer to get you a crazy check. Try to kill yourself get a crazy check.

  • Report this Comment On April 13, 2013, at 5:27 PM, sj250 wrote:

    There are two things, if they are done, that would save Social Security and Medicare without penalizing people like myself that paid and earned it.

    One, make congress pay back all of the money that they have stolen from these funds.

    Two, cut off benefits to all immigrants and refugees that never paid a dime into the system. They are the only ones to whom this is an entitlement.

    The fastest way to fix things, would be to make congress give up their pensions and lifetime elite health care and force them to participate in Social Security and Medicare. You'd be amazed at how fast things would get fixed!!

  • Report this Comment On April 13, 2013, at 6:47 PM, neamakri wrote:

    STOP!

    Why does everyone assume SS can be fixed? Before year 2010 there were 4 workers per retiree (4:1). Sometime after 2010 when Baby Boomers retire, that will change to 3 workers per retiree (3:1). Thus the only "fixes" possible are to increase taxes 33% to make up for the missing worker, or else reduce retiree benefits 25% because of the missing taxes.

    STOP!

    The country of Chili had the same system and privatized over 20 years ago. All we have to do is copy them.

  • Report this Comment On April 13, 2013, at 9:10 PM, mobadthangood wrote:

    we are already getting screwed on taxing SS.

    SS is NOT tax exempt. You have ALREADY paid taxes on this money from your gross income. How is fair to tax it again AT ALL?

  • Report this Comment On April 13, 2013, at 9:42 PM, johnnysford02 wrote:

    All those clowns on the Hill, and the powerful media, have you all fooled and I can't believe you all fall for it. You know that they have trillions of money in Social Security and they will never run out, so wake up and quit being such fools.

  • Report this Comment On April 13, 2013, at 11:21 PM, gary1byrd wrote:

    i paid into social security for 40 years but there to many ppl drawing social security that never paid into it that needs to stop,

  • Report this Comment On April 13, 2013, at 11:32 PM, notalady wrote:

    1 - Raising the age for SS will make life difficult for people who work for companies who make people leave at age 65.

    2 - Why would making all pay into SS with no salary cap, allow it to last only until 2078? ..What is magic about 2078? ..Will no one be working?

    3 - Means testing is totally unfair. ..They have to pay into it and then they can't have it? ...I'm sure I would be very upset if that was tried on me!

    4 - CPI - a fancy way to give those truly poor a royal shaft! ..When I started collecting (early and in 2005) I received $955 per month. ..With no increase in 3 years I now receive the munificent sum of $1068!...And this does not include my Medicare/Medicaid coverage which comes out of the full amount of SS.

    But I also recieved notice this week that I will have to start paying $33 per prescription when I was only paying $4 before. ..Yeah - really living it up!

    5 - Taxing anything under $40,000 per year is just starving people! ..Anyone w/a pension or rich will never be effected as badly as I, or anyone else in my boots will!

    6 - Death benefits are no problem if both worked, or they are young and still able to work. ..But the kids need coverage until they finish school or they will just go on welfare themselves.

  • Report this Comment On April 14, 2013, at 6:21 AM, skypilot2005 wrote:

    A portion should be invested in U. S. stock index funds instead of government bonds.

    Re: The S&P 500, etc.

  • Report this Comment On April 15, 2013, at 2:46 PM, CRNA1109 wrote:

    I don't care what they say. I doubt I will get SS. I would rather get to keep it and self direct it for my own retirement. Yes I know. Some people would just spend it. No one should be responsible for themselves either right? Oh wait. The rich should be responsible for us all. After reading some of the comments, maybe we could implement a stupidity tax. Even at a low rare it would make us all rich.

  • Report this Comment On April 15, 2013, at 5:26 PM, XXF wrote:

    Obviously this is a left leaning financial website, but if I wanted to read this much unrestrained hatred for people who have been responsible their whole lives I'd have checked CNN.

    How about this, distribute to everyone under 50 the exact amount that they have paid in without interest (yep, everyone who works gets the shaft). Then take whatever is left in the trust fund, if any, and use it plus general revenues of the Federal Gov't to pay the obligations to those over 50 with payments adjusted by 50% of the chained CPI (old people get the shaft as well).

    Then, here is the kicker, going forward without any SS people who are responsible can retire to the high life and those who are not can retire to the soup lines and both groups of people get exactly what they deserve.

  • Report this Comment On April 16, 2013, at 9:49 AM, badnicolez wrote:

    Social Security is a massive wealth transfer from younger working people to older mostly non-working people. The older generation has had decades in which to save for retirement and will not have the face the type of inflation the younger generations will.

    The best solution is to means test it and, yes, it will turn into welfare. It is ridiculous that those of us in the middle class are currently funding greens fees for retired doctors and lawyers and bankers. You should see all of the oldsters at the casinos in Las Vegas every day, undoubtedly shoveling their SS checks into the slot machines.

    And no, you didn't "earn" the money you are given by SS. If you are a boomer, you will likely get out WAY more than you ever put in, so stop whining. If I can't retire until 70, neither should you.

    Another thing that should be done is to double the cap for single earner households so that two earner households earning under the cap aren't paying more than single earner households that earn a lot more.

  • Report this Comment On April 16, 2013, at 12:06 PM, mdk0611 wrote:

    1. alma 223 - Did you miss the provision in Obamacare that assesses the equivalent of a payroll tax on investment income and capital gains of 3.8% for wealthy taxpayers? Or are you saying it should be applied at all income levels.

    2. I love the fire and brimstone "Social Security is not an entitlement! I paid for it and I want my full benefit!!!" Howard Beale would be pleased.

    UNLESS - You are wealthy. Then your benefits don't belong to you and you can pound salt.

    3. Taxing Social Security benefits at 100% is a problem, given employees have already paid income tax on their contributions. 85% is probably a pretty equitable rule given that fact.

    4. IMHO, the best way to deal with it is to add another year to the normal retirement age for those under age 40 and go to chain CPI for those receiving benefits.

  • Report this Comment On April 17, 2013, at 8:33 AM, deckdawg wrote:

    " Alternatively, eliminating the current maximum of $113,700 on which taxes are collected would keep Social Security solvent until 2078"

    Dan, I've seen this idea bandied about, but never with any facts or studies behind it. It doesn't pass the common sense test. First of all, the maximum is already raised almost every single year. That maximum is already set to include 99.99 percent of all wages paid. What percent of individual salaries do you think are higher than $114K a year? Keep in mind that, in a two income household, if each spouse makes $114K, all $228K of houshold income will be taxed. Salaries over $200K are extremely rare. Household incomes over $200K are not rare (but not particularly common either.)

    What I have seen recommended is that if all income were subject to Social Security tax, the problem could be fixed. That's a whole different idea. Sort of like a universal flat tax. In this scenario, your SS check itself would have SS taxes taken out. Any dividends or capital gains you are living on would have SS tax taken out. The income inside your 401K or IRA would have SS taxes taken out each year. And, beyond about the current maximum benefit level, these additional taxes would earn no additional SS benefit. SS would become a pure welfare system.

    If the whole SS funding problem could be fixed by simply raising the wage maximum, it would already be done. There aren't enough folks making over $114K a year (in wages) to make much of a squawk.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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