It's probably no secret by now, but the Social Security program, which is arguably the most important social program for seniors in this country, is in big trouble.
Each month, more than 60 million people in the U.S. are receiving a Social Security benefit, and of those, two-thirds are retired workers. According to national pollster Gallup, 59% of retired seniors rely on Social Security benefits for a "majority" of their monthly income, with another 31% counting their benefits as a "minor" source of income.
But, big demographic shifts are beginning to wreak havoc on Social Security. Baby boomers are retiring at a rate of more than 10,000 people per day, and they'll continue to do so for more than a decade. This is going to increase the number of eligible beneficiaries and push the worker-to-beneficiary ratio down. By 2034, per the Social Security Board of Trustees, the Old-Age, Survivors, and Disability Insurance Trust (OASDI) will be out of spare cash.
The other issue being that life expectancies are lengthening. While a good thing in many aspects, and a testament to our improved healthcare system, the founders of Social Security never anticipated that life expectancies would rise by roughly nine years between the mid-1960s and mid-2010s. Living longer means being able to pull a benefit check for a longer period of time, further hampering the program.
15 ways to save Social Security
So what should be done to save Social Security? That's the great question that lawmakers on Capitol Hill can't seem to figure out. However, they're certainly not hurting from a lack of ideas. Here are 15 different ways Social Security can be saved, either completely or to some varied degree.
1. Cut benefits across the board right now
According to the 2016 Trustees' report, benefits could be cut by as much as 21% in 2034 in order to keep Social Security solvent through 2090. A solution to stem such a steep cut 18 years from now is to take cuts across the board right now. In a 2014 analysis by the Center for Retirement Research at Boston College, it was suggested that an immediate 13% across-the-board benefit cut would extend the life of Social Security for 75 years. It's a surefire fix, but it also would be an immediate income cut for those 59% of seniors who are heavily reliant on Social Security, as well as pre-retirees with minimal retirement savings.
2. Change the cost-of-living adjustment
Currently, cost-of-living adjustments, or COLAs, are calculated using the CPI-W, or Consumer Price Index for Urban Wage Earners and Clerical Workers. The CPI-W takes into account tens of millions of working Americans' spending habits. The problem is that the spending habits of workers may not align with that of seniors. This is where the CPI-E, Consumer Price Index for the Elderly, could be used. The CPI-E gives more precedence to housing and medical care costs, which are a higher burden for the elderly, while de-emphasizing apparel, education, and entertainment costs a bit. The only concern is adjusting COLA to the CPI-E only eliminates a small percentage of Social Security's funding shortfall.
3. Raise the earnings cap
By far the most popular solution, according to an informal Washington Post poll in 2014, is to raise the earnings cap. In 2016, all earned income up to $118,500 is taxable at 12.4% and paid into the OASDI. Typically you and your employer split this tax down the middle (6.2% each), with self-employed people paying the entire amount. However, no earned income beyond $118,500 is taxable by Social Security. Since most working Americans make less than $118,500 a year, they'd like to see this earnings cap raised, or eliminated entirely. This would require the wealthy to pay more, while affecting as few people as possible.
The downside? It, too, doesn't eliminate Social Security's budget shortfall, and it also gives the well-to-do little extra in return for their added contribution since there's a maximum monthly benefit.
4. Allow beneficiaries to invest in the stock market
Some pundits have suggested privatizing Social Security, at least partially. Privatizing the program means giving future beneficiaries access to a portion of their benefits to invest in riskier, but potentially higher-yielding assets. Currently, all $2.8 trillion in spare cash is invested in special issue bonds and certificates of indebtedness. These generally have low rates of return thanks to the current Fed-induced low-yield environment. Being able to invest in stock or other riskier assets could help boost returns and set consumers up for a bigger payment come retirement.
The concerns with this plan are twofold. First, it also fails to fully bridge the budget shortfall, and secondly it might entice people to take unnecessary risks, thus putting low-income consumers with poor financial knowledge in an even worse financial situation come retirement.
5. Do nothing and cut benefits when the spare cash is depleted
Lawmakers could always choose to do absolutely nothing and cut benefits across the board when the spare cash from the OASDI is depleted. Based on the estimates of the Trustees, we'd be looking at a 21% cut in benefits by 2034 for everyone. The upside is this completely solves Social Security's funding woes, but it's also the most unpopular Social Security fix. Not to mention the 21% cut in benefits could be devastating to seniors heavily reliant on the program to make ends meet.
6. Do nothing and enact payroll tax hikes when the spare cash is depleted
On the flipside, lawmakers could also choose to do nothing and implement a payroll tax increase once the OASDI's spare cash runs out. The Trustees have been pretty clear in this years' and past reports that the longer Congress waits to enact payroll tax hikes, the bigger they're going to need to be to cover the expected budget shortfall. A payroll tax hike would certainly cover 100% of the shortfall, but it may also be a big burden on lower- and middle-income individuals and families.
7. Offer a buyout
We have to go into the way-back machine for this one, but in 2007 then-presidential candidate Mike Huckabee suggested that well-to-do individuals who wouldn't be in any way reliant on Social Security income be offered a one-time buyout. Huckabee's suggestion is that these wealthier individuals could purchase a tax-free annuity with their buyout funds, thus freeing up the government from being further obligated with making payments to this group of well-to-do individuals. The downside is it's unlikely a buyout option would make a big dent in the current budgetary shortfall.
8. Link life expectancies to benefit levels
Another solution would be to attempt to link life expectancies to benefit levels. Generally speaking, wealthier individuals tend to live longer than lower-income individuals, which is a reflection of lower-income folks not having the same ease of access to medical care that well-to-do persons have had for years. Linking life expectancies to benefits would be a progressive measure designed to reduce what the wealthiest individuals take home from Social Security. Though it would certainly level the playing field a bit, its effect on narrowing Social Security's cash shortfall would probably be minimal.
9. Means-test for benefits
Early in the presidential race, Republican nominee Donald Trump quipped that he would forgo his Social Security payment, and that other well-to-do persons should do so as well. In a way, Trump was promoting the idea of means-testing.
With means-testing, an annual income level could be set at which individuals would no longer qualify for a benefit. For example, if an individual who was eligible to receive Social Security benefits was netting $200,000-plus in annual income, he or she probably doesn't need Social Security benefits to make ends meet. It's an idea that would probably gain support considering that it would affect only a small percentage of Americans, but once again it wouldn't come anywhere near closing Social Security's cash shortfall.
10. Raise the full retirement age
A popular proposal from some lawmakers on Capitol Hill, including a number of this year's Republican presidential candidates, is to raise the full retirement age, or FRA. Your FRA is a dynamic number that changes based on your birth year and is the point at which you become eligible to receive 100% of your benefits. Raising the FRA would take into account that life expectancies are rising, and that we probably should be working longer.
However, raising the FRA could be a crushing blow to the 45% of Americans currently claiming benefits as early as possible at age 62. Since benefits grow with each year that you wait, further raising the FRA could mean consumers accepting reductions of more than 30% from their FRA if they filed for benefits at age 62. Worse yet, raising the FRA only takes care of about 30% of the 75-year shortfall.
11. Use the estate tax to cover Social Security benefits
Some lawmakers have suggested using other sources of income to help bridge Social Security's imminent shortfall. One of those solutions entails redirecting revenue generated from the estate tax -- a tax levied on estates over $5.45 million for an individual -- to the OASDI. According to the Center for Retirement Research, doing so would eliminate about a quarter of the expected Social Security shortfall, but it would also leave the federal government searching for new sources of revenue.
12. Freeze the purchasing power of benefits
COLA has ensured that seniors' benefits increase with inflation. One proposal suggests eliminating COLA entirely and freezing the purchasing power of benefits at today's level. Doing so would almost certainly eliminate Social Security's projected budgetary shortfall, but it would also reduce what seniors are able to purchase with their benefits. Imagine an environment where the cost of goods and services, including rent and medical care, kept increasing, but your benefit payment stayed the same. For seniors reliant on Social Security, freezing COLA could be disastrous.
13. Freeze the purchasing power of benefits on a sliding scale
Building off of the previous solution, there's a less abrupt way of freezing the purchasing power for seniors receiving Social Security: Freeze COLA on a sliding scale based on income. In other words, lower-income individuals would be protected from a COLA freeze, while middle- and upper-income individuals would see their COLA frozen. Approaching a purchasing power freeze this way would eliminate about 65% of the budgetary shortfall over the next 75 years, but it could come at a big cost to middle-class individuals and families.
14. Transfer start-up costs to general government revenues
When Social Security came into existence more than 80 years ago, retirees were receiving benefits that were considerably higher than what they'd paid into the system. These "start-up costs" of the program have been built into its ongoing costs for the past eight decades. One suggestion is to remove these built in start-up costs and transfer them to general government revenue. Doing so would eliminate the budget shortfall in Social Security since it would tie each generations' benefit payments to the amount they paid into the program. On the downside, we would still likely see an immediate need for payroll tax hikes or benefit cuts.
15. Increase the payroll tax on everyone right now
Finally, we have the opposite of the very first suggestion: increasing taxes on every working American right now. As noted above, the payroll tax increase needed grows in size the longer lawmakers wait to act. In 2016, per the Trustees report, a payroll tax increase of 2.66% in the OASDI should be expected to bridge the shortfall. Raising taxes right now would be expected to solve Social Security's woes, but it would mean at least an extra tax burden of 1.33% for the American worker moving forward.
Which solution, or set of solutions, do you favor? Let us know.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.