Sometimes the truth hurts. And the truth of the matter is that Social Security, arguably America's most important social program, is in some pretty deep trouble.
According to the newest Social Security Board of Trustees report, released in early June, Social Security is expected to hit an unwanted inflection point this year. The intermediate-cost model suggests that $1.7 billion more in benefits will be paid out to eligible beneficiaries than the program will generate in revenue. This would represent the program's first net cash outflow in 36 years.
Even more important, this turning point sheds light on the unsustainability of the current payout schedule. In 2020 and beyond, the program's net cash outflow is expected to grow with each passing year. By 2034, the roughly $2.9 trillion that had been built up since 1983 is projected to be completely exhausted. And if this excess cash disappears, then an across-the-board benefit cut of up to 21% may be needed to sustain payouts through 2092. To maintain Social Security's current payout schedule, an estimated $13.2 trillion cash shortfall between 2034 and 2092 must be dealt with.
While the good news is that Social Security isn't going bankrupt, even without a single red cent in excess cash, the bad news is that the 62% of current aged beneficiaries who rely on the program for at least half their monthly income would be in some serious trouble.
What measure(s) would you take to fix Social Security?
The key takeaway here is that a Social Security fix is absolutely going to be needed to protect the payouts of current and future retirees. The question is: How should the program be fixed?
Having written about Social Security for years, and after reading numerous blog posts on the subject, I've seen four popular public opinions on how best to resolve Social Security's issues. While some of these solutions would resolve the program's cash shortfall, others could actually make things worse. And a couple are based on myths.
In no particular order, here are four ways that John and Jane Q. Public suggest fixing Social Security.
1. Tax the rich
Not surprisingly, the solution that I see most often touted by the American public is to tax the rich.
Currently, Social Security's 12.4% payroll tax caps at $128,400 in earned income. Even though this maximum taxable earnings cap adjusts annually with the National Average Wage Index, it still allows higher-income workers to be exempted from Social Security's payroll tax on some portion of their income above $128,400. To the more than 90% of workers earning less than this amount, and therefore paying into Social Security on every dollar they earn, this simply isn't fair.
The solution would be to raise or eliminate the maximum taxable cap. Doing so would only impact a small percentage of workers, and it would raise additional revenue for the program that could push out or erase the program's projected 75-year cash shortfall. Since it only impacts a single-digit percentage of workers, taxing the rich is the most popular strategy for fixing Social Security.
But there are drawbacks that have kept this solution from being implemented. For one, Republicans won't vote in favor of increasing payroll taxes. Any legislation to amend the Social Security Act is going to take 60 votes in the Senate, and it's been four decades since any party has had a supermajority (60 seats). This makes it extremely unlikely that this solution would find traction in Congress.
The other issue is fairness toward the rich. Even though the wealthy are far less likely to be reliant in any capacity on their Social Security income than, say, a low- or middle-income individual or family, having to pay extra into the program without receiving one cent in added benefits during retirement is a major sticking point.
2. Force Congress to pay back all the money it "stole," with interest
If there were a really close second to the cries of "tax the rich," it would be the suggestion that lawmakers on Capitol Hill pay back the money they have taken from Social Security's trust fund, and return it with interest. Folks who believe this are of the opinion that having this money returned to the trust would eliminate the supposed cash shortfall the program is facing in the decades ahead.
However, unlike taxing the rich, which has a genuine chance to resolve the program's issues, this solution is pure fantasy and just plain wrong.
The belief that Congress "stole" or "raided" Social Security isn't correct. Rather than the program simply sitting on $2.9 trillion in cash that's earning no interest and losing out to inflation, the Social Security Administration instead buys special-issue bonds from the federal government with this excess cash. Transferring the status of Social Security's asset reserves from cash to bonds doesn't mean the money isn't there. If Congress were to suddenly stop borrowing from Social Security and return the $2.9 trillion, the program wouldn't have any extra assets than were previously accounted for. In essence, the program would be on no better footing.
Plus, Social Security is earning interest (approximately 2.9%) on the money Congress is borrowing. The program was paid $85.1 billion in interest income last year. If Congress were no longer allowed to borrow from Social Security by issuing special bonds, the Social Security program would lose out on around $800 billion in interest income over the next decade.
This isn't a valid solution, or an even halfway believable myth.
3. Raise the full retirement age
Though this remains a ways behind the idea of raising or eliminating the maximum taxable earnings cap in terms of popularity, the public has shown that it is modestly in favor of gradually raising the full retirement age to account for longevity. In an informal online poll conducted by The Washington Post in 2014, raising the full retirement age was the second-most-popular solution to fix Social Security among readers, out of a dozen possible choices.
Your full retirement age is the age at which the Social Security Administration will pay you your full retirement benefit. It's determined by your birth year, with most folks likely to have a full retirement age of 66, 67, or somewhere in between. The thing is, longevity has been increasing at a much quicker pace than the full retirement age, which has allowed retired workers to receive a benefit for an extended period of time. Over the long run, this has strained the program.
The solution would be to increase the full retirement age to, say, 68, 69, or even 70. In doing so, workers would need to either wait longer to receive their full payout, or claim early and accept an even steeper reduction in monthly payouts. Either way, lifetime benefits to future generations of retirees would be reduced, saving the program money and potentially erasing the noted $13.2 trillion cash shortfall.
The problem, though, is that while raising the full retirement age protects current seniors, it throws future generations under the bus. In particular, it could be especially difficult on lower-income individuals and families who may not have the option of waiting until age 68 to 70 to claim their full benefit.
Also, just as Republicans would block any attempt to increase the payroll tax on the wealthy, Democrats aren't in favor of raising the full retirement age. This stalemate is a pervasive trend on Capitol Hill.
4. Stop giving money to undocumented workers who didn't pay into the program
Another solution touted by the public that I've commonly come across is to stop giving benefits to undocumented workers and people who haven't paid into the Social Security program. The idea being that cutting off their benefits would restore the health of Social Security.
As with the idea of Congress "stealing" Social Security's money, we have another myth that simply won't go away.
The plain truth is that only American citizens are eligible to receive a Social Security benefit -- and even then it's not guaranteed. A worker needs to earn 40 lifetime work credits, of which a maximum of four can be earned per year, in order to qualify for retired worker benefits. Thus, immigrants first need to become citizens of this country, and then earn 40 lifetime work credits, before they're eligible for benefits.
This false perception of undocumented workers reaping the benefits of Social Security likely persists because the American public doesn't understand the difference between Social Security and Supplemental Security Income, or SSI. Though Social Security and SSI are run by the Social Security Administration, they receive funding from completely different sources. And while SSI can offer financial support to those seeking asylum, as well as immigrants being accepted to this country for permanent residence, that is of no consequence to Social Security's bottom line.
In short, this isn't a viable solution.
With these popular public opinions in mind, how would you approach fixing Social Security?