Social Security is, for a majority of retired workers, a financial lifeline that ensures they can meet their month-to-month expenses during their golden years. While the average retired worker is only netting a little more than $16,000 a year from Social Security, 61% of beneficiaries count on their benefits to comprise at least half of their monthly income.
Social Security is 17 years from the tipping point
Social Security is also a cause of major worry for many retirees and pre-retirees. According to the latest report from the Social Security Board of Trustees, the program's more than $2.8 trillion in spare cash is slated to run dry by the year 2034. This is primarily a result of the ongoing retirement of baby boomers and the subsequent lowering of the worker-to-beneficiary ratio. There simply aren't enough workers to replace those boomers that leave the workforce.
If Congress doesn't act and find a solution to boost revenue for the program, the Trustees estimate a benefits cut as steep as 21% may be needed to prolong payouts through the year 2090. For added context, a 21% cut in the average retired workers' benefit would put him or her just a few hundred dollars above the federal poverty level for the full year, based on 2017 dollars.
Clearly, this is an issue that has the full attention of seniors and pre-retirees, and it should have the attention of Congress. Unfortunately, despite a full complement of possible solutions, neither political party in Washington has been able to come up with a fix they can agree upon.
Payroll taxes are the key
Despite a lack of action on Capitol Hill, one simple plan remains in play that would quickly and easily fix Social Security's long-term woes and allow the program to continue paying out benefits without the threat of a cut: adjusting the payroll tax rate.
All working Americans pay a payroll tax, often referred to as the FICA tax, based on their income. These FICA taxes come to out 15.3% per individual (12.4% for Social Security and 2.9% for Medicare), although most workers only pay half (7.65%). If you're employed by someone else, your responsibility is to pay 6.2% to Social Security on earned income between $0.01 and $127,200 (the maximum taxable earnings for 2017), and 1.45% to Medicare (which has no earnings cap). Your employer picks up the remaining 7.65%. And don't worry, FICA taxes are automatically taken out of your paycheck, so it's rarely something you need to worry about, unless you're self-employed or a business owner.
According to the 2016 Trustees report, Social Security was running an actuarial deficit of 2.66%. In plainer English, this means an estimated 2.66% increase in total payroll taxes (thus 15.06% instead of 12.4%) would completely resolve Social Security's budgetary shortfall through 2090. For most workers, we're talking about parting ways with an extra 1.33% in earned income.
This simple solution would lead to a 30% increase in benefits, but there's a catch
However, a separate payroll tax increase proposal that was examined by the Office of Retirement Policy estimated a positive median benefit increase of 30% for beneficiaries by 2050. Based on the current average payment for retired workers of $1,362.64, we're talking about the average retiree taking home about $1,771.43 a month (in 2017 dollars) by 2050. That would be a major improvement that would place tens of millions of today's working Americans on more solid footing come retirement.
Now, for the bad news.
The suggested proposal involved more than a 2.66% payroll tax hike. The proposal examined by the Office of Retirement Policy assumed a 15.2% payroll tax rate for Social Security (thus 7.6% for employees) beginning in 2026 and lasting through 2055, then jumping once more to 18%, or 9% for most workers, in 2056 and every year thereafter. In this model, every last Social Security beneficiary would receive a larger payout, with a median income boost of 30%.
A similar proposal was also recently examined by Social Security's actuaries that involved the same payroll tax hikes (15.2% and 18%) but pushed the implementation dates for both back by three years, to 2029 and 2059, respectively. Above you can see the summary of these measures, with the payroll tax hikes more than compensating for the programs' more than $11 trillion budgetary shortfall.
Essentially, seniors could be guaranteed a 30% pay raise through 2090, but it would mean that workers would need to part with an extra 1.4% of their income beginning in 2026 or 2029, depending on the model, and another 1.4% in 2056 or 2059. For the average American earning roughly $50,000 a year, we're talking about paying an extra $1,400 in income (in 2017 dollars) into Social Security by 2056 or 2059. These are the sacrifices that may have to be made in order to ensure that seniors have ample income during retirement.
Little support for payroll hikes of this magnitude
Of course, this is a tall task. The 2016 Voice of the People (link opens PDF) survey that questioned nearly 8,700 people in selected states about their willingness to accept a Social Security payroll tax hike found that 76% of respondents would accept an increase in the payroll tax of 0.4% (0.8% including the employers' portion) to 6.6%. However, when questioned about a 0.7% increase to 6.9%, or a 1% hike to 7.2%, approval rates dropped to just 45% and 19%, respectively. Mind you, the first hike in the above models would bring most workers' payroll tax responsibility to 7.6%! Needless to say, it would be difficult to garner the support needed to lift median payouts to beneficiaries by a median of 30%.
I've previously opined that a long-term fix for Social Security is probably going to entail some combination of increasing revenue and decreasing benefits. Trying to work entirely on one side of the equation or the other is going to make things difficult on workers, current retirees, or future retirees. Though raising the payroll tax rates and/or adjusting the maximum taxable earnings is probably a smart move to consider, it may not be a solution by itself.
In the meantime, the Social Security debate continues.