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The Real Social Security Fix Will Look Like This

By Dan Caplinger - Mar 7, 2020 at 11:02AM

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Forget what the presidential candidates say. Practical reality will win out in the end.

People have known for decades that Social Security would face a potential financial crisis in the not-too-distant future. With a flood of Baby Boomers reaching retirement age and a relatively small cohort of Generation X and Millennial workers, Social Security's basic funding mechanism will be put to the test in the years to come -- and the program anticipates potential disruptions coming around the year 2035.

As we've seen in past presidential campaigns, candidates in 2020 have stated their cases for what they'd like to see Social Security do in order to avoid problems as the mid-2030s crisis looms. Some believe that boosting benefits is the right thing to do, with varying proposals seeking to pay for the rise in costs. Others prefer reining in future Social Security benefits in order to make the current level of funding go further. Yet as excited as many Americans are about the prospects for radical change to the Social Security system, the reality is likely to be a lot less transformative. Eventually, lawmakers are likely to take the path of least resistance to address Social Security funding, with just a single change taking care of the problem for the foreseeable future.

Two Social Security cards and a $100 bill.

Image source: Getty Images.

Plenty of Social Security proposals

We've seen plenty of discussion among major candidates about what Social Security should look like. Among the proposals are the following:

  • Bernie Sanders (I-Vt.) would boost benefit levels for all Social Security recipients, with extra increases targeted to low-income participants. Future increases would get tied to a measure of inflation more suited to elderly spending patterns. To pay for those benefits, Sanders would impose payroll taxes on earned income above $250,000.
  • Former Vice President Joe Biden has said he would support measures to strengthen Social Security, with potential benefit increases for those in need. However, his past track record on Social Security has been less friendly to Social Security boosts, with Biden having taken a more centrist approach in considering measures like raising the retirement age.
  • President Donald Trump has also had varied views on Social Security over the years, having vowed to leave the program alone during past campaigns but also saying that he'd be open to putting entitlement programs like Social Security onto his agenda in a potential second term.

Other proposals currently under consideration have similar traits. The Social Security 2100 Act, for instance, would impose a payroll tax above $400,000 in earned income, and it would gradually enact a 2.4 percentage point increase to the combined employee and employer payroll tax that funds Social Security benefits. Taxation of benefits would be eased slightly, and cost of living adjustments would get tied to a better measure of retiree costs.

The problem with all of these proposals is that under the current state of affairs in Washington, they would all need bipartisan support to get through Congress and the White House. Regardless of who wins the presidential election later this year, relatively few people anticipate that one party will control both the Senate and the House of Representatives -- and even if that unlikely event happens, the odds are good that margins will be narrow enough to allow procedural delays to impede forward progress on contentious issues.

What's probably going to happen

Given the political realities, the most likely course for Social Security policy is for nothing to happen at all. Fortunately, we already have a sense of what the consequences of that will be. The 2019 Social Security trustees report provided plenty of context on exactly what would be necessary if lawmakers take no action:

[M]aintaining 75-year solvency with changes that begin in 2035 would require: (1) an increase in revenue by an amount equivalent to a permanent 3.65 percentage point payroll tax increase to 16.05% starting in 2035; (2) a reduction in scheduled benefits by an amount equivalent to a permanent 23% reduction in all benefits starting in 2035; or (3) some combination of these approaches.

Of these solutions, the painful one for recipients -- a 23% benefit reduction -- would be equally painful for politicians. It's therefore much more likely that lawmakers will take steps to raise revenue by doing the payroll tax increase.

What workers would see is an increase in their withholding for Social Security taxes from 6.2% to just over 8%. That would likely reduce take-home pay by considerably more than 2%, because the payroll tax gets imposed on gross pay that includes the money that's already taken out for other things like federal and state income tax withholding.

In addition, employers would also see their payroll tax burden rise by an equivalent amount. Many workers don't realize that their employers currently match the 6.2% that gets withheld from their checks with a 6.2% employer payroll tax.

Nothing is certain

Of course, it's possible that Washington will get its act together and do something before 2035 arrives. Given the track record on the issue, however, it's not especially probable. Current and future Social Security recipients should therefore get comfortable with the likely scenarios for the program if nothing changes going forward.

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