More than 65 million people in the United States currently receive Social Security benefits, and nearly 90% of retired workers rely on those benefits to some degree, according to pollster Gallup. But the Social Security program is also an important part of the retirement planning process for future retirees and their spouses.
Unfortunately, the program is in desperate need of reform. Here are three of the most pressing problems for seniors on Social Security -- and a recommendation on how to the fix them.
1. The OASI trust fund will be depleted by 2034
The Old-Age and Survivors Insurance (OASI) Trust Fund -- the source of Social Security benefits paid to retirees and survivors -- will run dry in 2034, according to a recent report from the Board of Trustees. Beyond that point, the program will rely entirely on payroll taxes, but that revenue will only cover 77% of the scheduled benefits.
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The problem actually started when birth rates skyrocketed after World War II, a period known as the baby boom. But birth rates have since decreased while life expectancy has increased, causing the worker-to-beneficiary ratio to drop from 41.9 in 1945 to 2.8 in 2021. Even worse, that figure will continue falling in the coming years, according to the Board of Trustees, meaning the number of workers that pay taxes into the Social Security program is dropping in relation to the number of seniors that receive a monthly benefit. Obviously, that trend is unsustainable.
One potential solution for the Social Security program is to get additional funding, and the most obvious way to make that happen is by increasing Social Security tax revenue. Currently, employees pay 6.2% in Social Security tax on their first $147,000 in earnings each year (and employers match that figure for a combined total of 12.4%), while any wages beyond that point are not taxed. With that in mind, raising the maximum taxable earnings or removing the limit altogether would theoretically extend the solvency of the OASI Trust Fund.
President Joe Biden has discussed one such solution. His plan would apply Social Security payroll tax to all earnings above $400,000, meaning it would affect roughly 2% of Americans. Additionally, a handful of Democratic politicians have cosponsored a bill known as the Social Security Expansion Act, which would expand Social Security payroll tax to all earnings above $250,000.
2. Social Security benefits have fallen behind inflation
From Jan. 2000 to March 2022, Social Security benefits lost 40% of their buying power, according to a recent study from The Senior Citizens League. In other words, for every $100 in goods and services a retiree purchased with their monthly benefit check in 2000, they can only buy $60 worth today. That problem arises from the way cost-of-living adjustments (COLAs) are calculated.
Social Security COLAs are intended to protect the buying power of benefits by ensuring the payment retirees receive each month increases at the same pace as inflation. But the Social Security Administration currently measures inflation using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a metric based on the spending patterns of office workers and other wage earners. Those individuals tend to spend more on recreation, education, and transportation, while seniors tend to spend more on medical care, prescription drugs, and housing. That makes the CPI-W a poor measure of inflation for seniors, because it underemphasizes many of the most important spending categories.
To solve that problem, many experts have suggested using the Consumer Price Index for the Elderly (CPI-E) instead of the CPI-W. The CPI-E tracks purchases made by individuals aged 62 and older, which theoretically makes it a more accurate measure of inflation for the senior population.
3. More seniors are paying taxes on Social Security benefits
The federal government started taxing Social Security benefits in 1984, though very few seniors met the income thresholds when the law was first passed. In fact, fewer than 10% of beneficiaries actually paid federal income tax on their Social Security check at that time. Benefits have been adjusted for inflation each year since then, but Congress has never adjusted the Social Security income thresholds subject to taxation. As a result, approximately 50% of beneficiaries now pay federal income tax on a portion of their benefits, according to the Congressional Research Service.
The solution to that problem is straightforward: The income thresholds must be adjusted for inflation. Otherwise, the number of seniors that pay taxes on their benefits will continue to climb each year.
A final recommendation for current beneficiaries and future retirees
More than 70% of Americans worry the Social Security program will run out of money during their lifetimes, but most experts disagree. The wheels of change may turn slowly in Washington, but Congress will eventually have to address the issues discussed in this article.
That said, retirees should always stay informed on the latest news, and future retirees should take steps to minimize their dependence on Social Security. Financial planning may not be exciting, but if you save diligently and contribute regularly to one or more retirement accounts, chances are your golden years will be more enjoyable.
