For senior citizens, Social Security ranks at or near the top of their primary ongoing concerns. The reason is that around 60% of the more than 41.2 million retired workers receiving Social Security benefits as of December 2016 relies on Social Security for at least half of their monthly income. An even higher number of unmarried elderly individuals (71%) leans on Social Security income to represent at least half of their monthly take-home pay.
Social Security benefit cuts may be on the way
Despite being of such vital importance to many seniors, the Social Security program isn't in the best of shape. Baby boomers are retiring at a rate of more than 10,000 per day, which is weighing down the worker-to-beneficiary ratio, and people are living considerably longer than they were just five decades prior, meaning benefits can be pulled from the program for an extended period of time. These and other smaller contributing factors are expected to flip the switch on Social Security and turn it from a program that brings in excess cash each year to a program that's paying out more in benefits than it's receiving in revenue by the year 2020. Come 2034, the more than $2.8 trillion in spare cash currently invested in special issue bonds and certificates of indebtedness will be completely exhausted, at least according to the Social Security Board of Trustees report in 2016.
There is a silver lining, though. Despite a long-prevailing myth that's been known to sucker about half of all people, Social Security isn't going bankrupt and it will be there for many future generations of Americans when they retire. As long as people continue to work and get paid, Social Security will generate revenue from the payroll tax, ensuring some level of payouts to eligible beneficiaries.
However, this silver lining can still tarnish without the required TLC from Congress. If lawmakers on Capitol Hill continue to sweep Social Security's problems under the rug, benefits may need to be cut by as much as 21% once its spare cash is completely depleted. That aforementioned majority of retired workers who rely on Social Security income could be devastated if that happens.
President Donald Trump has chosen to keep his distance from various entitlement programs (Social Security and Medicare), suggesting during his campaign that he wouldn't make any direct changes to them. Instead, Trump is indirectly trying to influence these programs by cutting taxes for consumers and businesses, and doling out $1 trillion in infrastructure spending over the next decade, in an effort to kick-start U.S. GDP growth. Higher growth rates could boost consumers' incomes and thus the payroll tax revenue generated by Social Security.
There's a very easy way to fix Social Security
But there's actually a much quicker, simpler, and effective solution to fixing Social Security for the next 75 years.
According to the Social Security Board of Trustees, the long-term (75-year) actuarial deficit for the program is 2.66%. In plainer terms, the Trustees mean that an across-the-board increase to the payroll tax of 2.66% would generate enough income that no benefit cuts would be needed until sometime around the year 2090. The Trustees were also pretty clear that the longer Congress waits to raise payroll taxes, the larger the percentage hike would need to be to eliminate the budgetary gap in Social Security through 2090.
The payroll tax (which probably shows up as "FICA" taxes on your payroll check, or perhaps FICA OASDI) is a 12.4% tax on earned income between $0.01 and $127,200, which is the maximum taxable earnings figure in 2017. Any wages earned above and beyond $127,200 would be free and clear of the payroll tax.
Yet, most people don't pay anywhere near 12.4% of their wages into Social Security. If you're self-employed you do, but if you're employed by someone else, the employer and employee split the responsibility of this 12.4% payroll tax right down the middle -- 6.2% each. Thus, if your salary is $50,000 annually, you would be responsible for $3,100 in Social Security payroll taxes and your employer would pay another $3,100 in Social Security payroll taxes on behalf of your earnings, making up the combined 12.4%.
Would you be willing to accept a 1.33% tax hike?
Based on the actuarial deficit calculated by the Trustees, increasing the payroll tax to an aggregate of 15.06% (12.4% + 2.66%) would eliminate the need for any benefit cuts for a number of generations. While it would fully impact the self-employed, most working Americans would only see an increase of half the amount, since employers and employees split the payroll tax down the middle. In short, working Americans would be looking at a payroll tax increase of 1.33% to 7.53% of their wages from 6.2%.
According to the wage data from the Social Security Administration in 2015, more than half of all Americans earned less than $30,000 in wage income. This would mean a 1.33% increase in the payroll tax would cost the average American about $400 extra per year, or a little under $7.70 per week. Think about that for a moment: If the average working American parted ways with nearly $8 per week, Social Security could probably be saved for future generations without the need for a benefit cut.
Would you be willing to accept a 1.33% hike to your payroll taxes if it meant the preservation of Social Security?
The "Voice of the People" survey in 2016 wound up asking nearly 8,700 respondents how much of a payroll tax increase they'd be willing to accept to preserve Social Security. When asked if 6.6% (a 0.4% increase, and 0.8% overall when the employers' portion is included) was acceptable, 76% of all respondents were in favor, including those identifying as Republican. However, when the payroll tax responsibility was bumped up 0.7% to 6.9%, national support fell to just 45%. When asked if 7.2% would be acceptable, a full 1% increase from what workers are paying now, support dropped to just 19% nationally. Mind you, a payroll tax of 7.53% would be needed to fix Social Security per the Trustees, and support at 7.2% is already below one in five.
These tough choices are a big reason why fixing Social Security hasn't been as easy as simply raising the payroll tax on all Americans. At some point over the next 17 years, change is coming. What remains to be seen is if that change might include an increased payroll tax on working Americans. However, the longer Congress waits to act, the more painful it'll be on the American worker once it finally does make changes.