It's the five words no senior wants to hear: Social Security is in trouble.
The latest annual report from the Board of Trustees paints a pretty grim outlook for the Social Security program. Although it's not in any danger of going bankrupt, the program we're familiar with today could look markedly different in less than two decades.
As per the Trustees, Social Security is set to begin expending more than it generates in revenue this year. With the exception of 2019, this net cash outflow is projected to grow with each passing year, culminating in the complete depletion of Social Security's nearly $2.9 trillion in asset reserves by 2034.
Should this excess cash disappear, it's estimated that an across-the-board benefits cut of 21% will be needed to sustain payouts through 2092 without the need for any further cuts. Given that more than 3 out of 5 aged beneficiaries currently lean on Social Security for at least half of their monthly income, it's a terrifying outlook.
The most popular and/or logical fixes for Social Security
Social Security needs to be fixed, and lawmakers in Washington are the ones to do the fixing. Thankfully, there are no shortage of solutions that would either completely resolve the program's long-term (75 year) cash shortfall of $13.2 trillion or at least make a sizable dent in this figure. Here are the five most popular and/or logical fixes to Social Security's mess.
1. Raise or remove the earnings cap tied to the payroll tax
Hands down, the most popular Social Security fix with the American public (at least in informal polling) and the go-to solution for Democrats on Capitol Hill is the idea of raising or eliminating the earnings cap associated with the 12.4% payroll tax on earned income.
In 2018, all earned income up to $128,400 is subject to the payroll tax, while income above that level is exempt. Only a small percentage of workers are exempt, but even so, $1.2 trillion in earnings escaped the payroll tax in 2016 --– and this figure is likely to grow over time.
The reason the public supports increasing this tax cap or eliminating it entirely is twofold. First, it would almost certainly erase the entire $13.2 trillion cash shortfall over the long term. And second, because more than 90% of working Americans are already paying into the program on every dollar they earn, increasing or eliminating the cap wouldn't impact them. If anything, it would be viewed as leveling the playing field with the rich.
2. Means-test for benefits
Another somewhat popular solution -- one, might I add, that's been suggested by both political parties -- is the idea of means-testing for Social Security benefits.
What's means-testing? Essentially, it's the idea of setting earning thresholds whereby Social Security benefits would be reduced and/or eliminated. During the 2016 presidential campaign, Republican-hopeful Chris Christie of New Jersey introduced his plan, which was to partially reduce benefits for earners with more than $80,000 in adjusted gross income (AGI) and remove benefits entirely for those folks bringing home in excess of $200,000 in AGI per year.
The purpose of means-testing is simple: Keep benefits out of the hands of people who don't need them. After all, Social Security was ultimately crafted in the mid-1930s to be a program that supports low-income workers during retirement. Although means-testing wouldn't do enough by itself to resolve Social Security's long-term cash shortfall, it would certainly make a dent.
3. Gradually increase the full retirement age
The most popular Social Security fix among Republicans involves gradually raising the full retirement age for future generations of retirees. Your full retirement age is the age at which you become eligible to receive your full monthly benefit, as determined by your birth year.
In 2018, the full retirement age for those born in 1956 -- and who therefore turn 62, the earliest eligible claiming age -- is 66 years and four months. By 2022, the full retirement age will peak at 67 years for everyone born in 1960 or later. Republicans would prefer to see this raised to as high as age 70.
The purpose of increasing the full retirement age is to encourage workers to stay in the labor force a bit longer, as well as to hold off on claiming their benefits. Workers would need to wait longer to receive their full benefits or accept a steeper reduction in their monthly payouts by claiming early. Whichever path they choose, workers would receive a reduction in lifetime benefits, thereby saving Social Security money over the long run.
4. Progressively link longevity to benefits
Another idea, similar to the above, is progressively linking longevity to benefits. The full retirement age would be linked to the average life expectancy in the U.S. and therefore fluctuate in step with this figure each year.
What's particularly neat about progressively linking longevity to benefits is that the age where delayed-retirement credits max out, currently age 70, would rise, as well. This would mean that healthier individuals who choose to wait could still receive well over 100% of their monthly benefit if claiming up to four years after their progressively adjusted full retirement age.
Social Security was signed into law in 1935, and through 2022, the full retirement age will have risen by just two years. Meanwhile, the average life expectancy is up nine years just since 1960. Progressively linking longevity to benefits would resolve this bifurcation and the strain that it's put on the program.
5. Increase the payroll tax rate on all working Americans
A fifth and final fix that's a mix of logic and popularity is increasing the payroll tax rate on all working Americans.
When the Trustees release their annual report, it includes a figure known as the "actuarial deficit." This deficit is the estimated amount that the payroll tax would need to increase today in order to generate enough added income to maintain Social Security payouts over the next 75 years, as well as leave a full year of payouts in the Trust's coffers by the end of that 75-year period. In 2018, it was 2.84%. In layman's terms, we're talking about an increase in the payroll tax to 15.24% from its current 12.4% to avoid any potential future cut to benefits.
In order for this estimate from the Trustees to be correct, this added tax would need to apply to all earned income below the earnings cap. In other words, it would be a tax increase for all working Americans that would go toward resolving the $13.2 trillion cash shortfall.
Five solutions with one common problem
With the exception of means-testing for benefits and progressively linking longevity to benefits, each of these solutions should completely resolve Social Security's imminent cash crunch. Unfortunately, they all come with one serious drawback: someone loses.
No matter what Congress proposes to fix Social Security, some group of people is going to lose out.
- If the earnings cap is increased or eliminated, then the wealthy would be required to pay more into the system without seeing an extra cent in retirement benefits.
- If means-testing is instituted, then well-to-do workers who've paid into Social Security like everyone else may not get a dime in return.
- If the full retirement age is increased, current retirees would be protected, but future generations of retirees would see their lifetime benefits reduced.
- If the full retirement age is linked to longevity, future generations of workers would see their lifetime benefits decrease.
- If the payroll tax is raised for all working Americans, it would reduce the ability of workers to save and invest for retirement, potentially making them more reliant than ever on Social Security.
There is no fix without an adverse consequence. And because there's a negative consequence with each solution, politicians fear making any changes. This is why Social Security's problems persist, and why you shouldn't expect a resolution from Washington anytime soon.