Social Security serves as a critical income source for millions of seniors, but the program is in trouble. In the coming years, it expects to owe more money in benefits than it collects in revenue, largely due to an anticipated mass exodus of baby boomers from the workforce.
Social Security can tap its trust funds to make up for a near-term revenue shortfall, but once those funds run out of money, benefit cuts will be on the table. And that could be catastrophic for the millions of retirees who rely on those benefits today, as well as future retirees who can't afford that hit.
As such, lawmakers are proposing changes to Social Security to help avoid a widespread reduction in benefits. Here are a few ways the program's rules might evolve in the coming years to sure up its finances.
1. A shift in full retirement age
Social Security benefits are based on seniors' lifetime earnings, and recipients can collect their full monthly benefit once they reach full retirement age, or FRA. Right now, FRA is either 66, 67, or somewhere in between, but some lawmakers are proposing that it be shifted to a later age -- somewhere between 68 and 70. Doing so could result in major savings for Social Security, and since life expectancies have been increasing, proponents of this idea argue that it's a reasonable course of action to take.
2. A higher wage cap -- or no wage cap at all
Higher earners don't pay Social Security taxes on all of their earnings. There's a wage cap that limits the amount of income that's subject to Social Security taxes each year. Right now, the wage cap stands at $137,700, and while it may increase modestly in 2021, it's unlikely to go up by more than a few thousand dollars. By contrast, there are plenty of people whose earnings well exceed $137,700 who get out of paying taxes on a large chunk of their income.
In an effort to save Social Security from insolvency, some lawmakers are proposing a much higher wage cap than $137,700, while others are calling for no wage cap at all. Either idea would of course anger the wealthy, but it would also serve the very important purpose of pumping money into Social Security to prevent benefit cuts.
3. A means test to determine eligibility
Right now, anyone who earns enough work credits during his or her career is entitled to Social Security benefits. This means that someone with an annual retirement income of $5 million can still collect Social Security, even if that money is virtually meaningless.
As such, some lawmakers have suggested implementing a means test for Social Security eligibility. With a system like this, higher earners would receive a reduced Social Security benefit or even none at all, while lower-income seniors would be able to collect more. Ultimately, the goal would be to put Social Security income into the hands of those who need it the most, all the while reaping savings by virtue of not having to pay higher earners.
Will these changes actually happen?
Right now, all of the above changes are ideas -- not givens -- and each one comes with its own drawbacks. Raising FRA, for example, will effectively cause beneficiaries to lose money. A higher wage cap will put some earners at a disadvantage -- namely, those who aren't exceptionally wealthy, but rather, earn a salary that's needed in certain areas of the country to keep up with a notably high cost of living (a $160,000 salary in New York City, for example, does not make a person wealthy). And means testing creates a scenario where seniors are punished for saving diligently and investing wisely to amass wealth after having spent years paying into a program they thought they'd be entitled to. Therefore, while it's certainly worth keeping an eye out for these changes, it's too soon to bank on them actually happening.