Social Security, arguably the most important program in the country as more than 42 million retired workers receive a monthly payout, is in trouble.
According to the 2017 report from the Social Security Board of Trustees, Social Security is expected to begin paying out more in benefits than it's generating in revenue by 2022. Just 12 years later, in 2034, the roughly $3 trillion in excess cash held by the program is forecast to be completely gone. Based on the current payout trajectory, there'll be an estimated $12.5 trillion budget shortfall between 2034 and 2091.
This shortfall has a lot of people, including working Americans, pre-retirees, retired workers, people with disabilities, and survivors, very concerned. There's good reason for that, as 62% of today's retirees lean on Social Security for at least half of their monthly income, and a majority of future retirees are expected to rely on the program in some capacity to make ends meet. Yet, the trustees' report suggests that benefits could be cut across the board by up to 23% in order to preserve the solvency of the program through 2091. The silver lining is that Social Security can't go bankrupt as a result of the payroll tax, which provides the bulk of its funding; but that doesn't mean the current payout schedule is sustainable.
The only option for current and future retirees to avoid having their Social Security benefits slashed is through congressional action. Lawmakers in Washington, D.C., certainly aren't denying that a problem exists. Unfortunately, they've been unable to come to an amicable solution. However, a new Social Security proposal, laid out last week by Sen. Patty Murray (D-Wash.), is aiming to change that.
There's a new Social Security modernization proposal on Capitol Hill
Known as the Stronger Safety Net (SSN) Act, Murray's proposal aims to modernize the 83-year-old program for women, children, people with disabilities, and survivors, while at the same time having those who can afford to pay more cover the long-term funding gap in the program.
The SSN Act has four key proposals.
1. Enhance benefits for divorced spouses: Under the current system, divorced spouses only have the option of receiving benefits based on their former spouse's earnings if they were married for a minimum of 10 years. Under Murray's proposal, divorced people over 62 who were married for at least five years would qualify, with a 10% step-down for each year below 10. In other words, a divorced person who was married for seven years would have a maximum spousal benefit of 70%, whereas someone who was married for nine years could max out at 90%. This same formula applies to survivor benefits as well.
Why the change? One of the bigger issues women in the workforce face is that they're often the ones who take care of children in the home or care for loved ones who are sick. This means they take time out of the labor force, which can reduce their lifetime earnings and retirement benefit. By enhancing divorcee benefits with less-stringent requirements, Murray's proposal would allow more women who divorced in fewer than 10 years the option of claiming spousal benefits, if their spousal benefit is higher than their work-based benefit.
2. Enhance benefits for widow(er)s: The SSN Act would seek to establish an alternative benefit for the surviving spouse in instances where both husband and wife have established their status as retired workers. The proposal suggests that the surviving spouse be entitled to 75% of the sum of the survivor's own work benefit and the primary insurance amount of the deceased spouse. This alternative benefit would be paid if it's higher than what survivors would receive under the current law, and would begin in 2019.
3. Extend benefits for children of retired, disabled, or deceased workers: Murray's proposal also aims to expand Social Security eligibility for the children of retired, disabled, or deceased workers. Under the current system, minor children have to be under the age of 18, or high school students under the age of 19, to qualify for benefits. But beginning in 2019, assuming the SSN Act is passed, full-time students up to the age of 23 of retired, disabled, or deceased workers would be eligible to receive benefits.
4. Introduce a special payroll tax for high earners: Last, the SSN Act seeks to generate additional revenue for the Social Security Trust by imposing an 2% payroll tax on earned income in excess of $400,000. The current payroll tax of 12.4% only applies to earned income between $0.01 and $128,400, as of 2018, meaning any income above $128,400 is not subject to Social Security's payroll tax.
The verdict? It'll struggle to gain traction
Of course, the big question is whether the Stronger Safety Net Act would gain any traction in Congress, and my suspicion is it won't -- for two reasons.
First, Republicans still hold a majority in the legislative branch of government, meaning they're unlikely to compromise on a Social Security proposal introduced by a Democrat like Murray. Republicans appear to be far too focused on an upcoming infrastructure bill and immigration reform to fit Social Security reform into the agenda. Plus, altering Social Security is viewed as political suicide with midterm elections closing in.
The bigger issue is that Murray's proposal would raise the payroll tax, albeit modestly relative to other proposals from her own party, on those earning $400,000 or more in earned income. Even though taxing high earners is the single most popular way of fixing Social Security, based on a number of national surveys, lumping an extra tax on the wealthy wouldn't provide them with any additional Social Security benefit come retirement.
I know what you're probably thinking: "The rich aren't reliant on Social Security, so they should pay extra tax to shore up the Social Security Trust." However, a maximum taxable-earnings cap -- the aforementioned $128,400 figure in 2018 -- exists because there's also a maximum monthly payout from the Social Security Administration at full retirement age. In other words, it's not "fair" to add a 2% payroll tax to an extra, say, $5 million in income if that individual won't see an extra cent in Social Security benefits. It's unlikely that Republicans would go along with such a measure, and their votes will be needed in the Senate to pass the SSN Act.
For the time being at least, I wouldn't count on any major changes to the Social Security program.