According to the latest snapshot from the Social Security Administration (SSA), around 41.9 million retired workers are receiving a monthly benefits check, and of those workers, some 61% count on that check for at least half of their monthly income. Social Security's importance in helping seniors meet their financial obligations simply can't be overstated.
Big Social Security benefit cuts may be just 17 years away
What also can't be said enough is just how much trouble America's most important social program is in over the long term. The latest annual report from the Social Security Board of Trustees pegged 2022 and 2034 as major inflection points. Beginning in 2022, the program will begin to pay out more in benefits than it's generating in revenue as a result of the ongoing retirement of baby boomers and lengthening life expectancies. By 2034, the nearly $3 trillion in asset reserves that Social Security once had will be completely depleted. If this were to happen, the Trustees have estimated that a 23% cut to the benefits of current and future retirees would be needed to ensure its solvency through 2091.
On the bright side, you can breathe a sigh of relief in that Social Security isn't going bankrupt. As long as you have 40 lifetime work credits by the time you enroll, you'll be receiving retirement benefits from the SSA. However, that may not make what could be an imminent benefits cut of up to 23% any more tolerable. Considering that the average retired worker is receiving $1,368.67 each month as of June 2017, a 23% cut in benefits would mean a reduction to less than $1,054 a month. That's only marginally above the federal poverty level.
In short, Social Security needs a fix that'll work to protect benefits for current retirees without mortgaging the future for today's workforce.
The case for raising taxes or cutting benefits
If we were to break down Social Security's "fixes" into their most basic form, we'd be looking at either raising taxes to generate more revenue or cutting benefits in order to resolve its expected $12.5 trillion budget shortfall between 2034 and 2091.
Raising taxes is traditionally a solution that Democrats have proposed in Washington. A 12.4% payroll tax on earned income between $0.01 and $127,200 is what primarily fuels income generation for Social Security. In 2016, 87.3% of the $957.5 billion it collected came from payroll tax revenue. However, that $127,200 maximum earnings cap allows about one in 10 Americans a free pass on the payroll tax for at least some of their income. Democrats want to fix that by requiring the wealthy to pay more into the system.
Republicans, on the other hand, have proposed increasing the full retirement age for future retirees, which is, in effect, a cut to future benefits. Those born in or after 1960 will already see their full retirement age increase to 67 by 2022. Republicans would like to see this figure gradually increase to age 68, 69, or 70 to compensate for lengthening life expectancies. Retirees would either have to wait longer to receive 100% of their benefits or accept a larger reduction to their monthly payout if they choose to claim early.
Raise taxes or cut benefits: It's not even close, according to the public
So, what should Congress do? According to the pretty overwhelming consensus from the American public by way of surveys, raising taxes and generating more Social Security revenue is the best solution to Social Security's woes.
In the summer of 2015, national pollster Gallup questioned the American public about what method they'd prefer. The question asked was as follows: "If you had to choose one of the following approaches to ensuring Social Security's long-term future, would you rather (1) raise taxes, (2) curb benefits, or (3) no opinion." In total, 51% of respondents chose to raise taxes, just 37% preferred curbing benefits, and 12% had no opinion on the matter. That's a pretty overwhelming response in favor of increasing income to the program.
Furthermore, a separate survey, known as "Voice of the People," questioned nearly 8,700 respondents in 2016 about how willing they'd be to accept an increase in their payroll tax to aid Social Security for future generations. When asked if they'd be willing to accept a 0.8% aggregate increase to 13.2%, 76% of respondents were in favor. Mind you, since most people aren't self-employed, their employer would cover half of this increase. Most workers would go from paying 6.2% of their earned income to 6.6% under such a scenario. Assuming the average worker makes $30,000 annually, we're talking about an extra $120 a year into the program.
Admittedly, favorability dropped as the proposed tax increases went higher, with just 19% supporting a 14.4% payroll tax, which would be a full 1% increase from what the average worker is paying now (and a 2% aggregate increase). This would still be 0.83% shy, in aggregate, of what the trustees predict will be needed to fix Social Security over the next 75 years (the latest report lists a 2.83% actuarial deficit). This suggests it could be hard to get a lot of public support for a payroll-tax increase, but compared with benefit cuts, it's the much-preferred solution.
Will Congress follow the will of the public on this matter? That's what remains to be seen.