Social Security moved more than 26 million Americans out of poverty last year, according to the Census Bureau, making it the most important anti-poverty program in the country. But the aging population coupled with declining birthrates have created a problem. Social Security faces a $20 trillion shortfall over the next 75 years, and the trust fund is on pace to be depleted by 2035.
At that point, the Board of Trustees says income from payroll taxes would cover only 80% of scheduled Social Security benefits, and that figure would drop to 74% by 2096. Of course, Government officials are well aware of the problem -- the Board of Trustees has been forecasting the demise of the trust fund since the 1980s -- but differences in political ideology among Republicans and Democrats have kept change at bay.
On the bright side, a recent survey from the University of Maryland indicates that certain proposed changes to Social Security enjoy bipartisan support among Americans.
Here are four changes that could save the program.
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Increase tax revenue for the Social Security program
Two proposed changes to delay (or stave off) trust fund depletion would increase tax revenue for the Social Security program. Specifically, one would apply Social Security payroll tax to more wages, while the other would increase the Social Security payroll tax rate.
Apply Social Security payroll tax to more wages: Under the current law, workers pay Social Security tax on the first $147,000 they earn, but any income above that limit is tax free. That means someone with an annual salary of $200,000 pays the same amount as someone with an annual salary of $2 million.
Many politicians want to change that, and one of the more popular proposals would apply Social Security payroll tax to all earnings above $400,000. That would create a donut hole that slowly closes over time, since the maximum taxable earnings limit is adjusted each year to account for changes in general wage levels.
According to the University of Maryland, 81% of Americans --79% of Republicans and 88% of Democrats -- are in favor of that change, and it would eliminate 61% of the shortfall over the next 75 years.
Increase Social Security payroll tax rate: Under the current law, workers pay 6.2% of their income (up to $147,000 in 2022) into the Social Security program, while their employer contributes an equivalent amount, bringing the total to 12.4%. Self-employed individuals pay the entire 12.4%.
Increasing the tax rate to 6.5%, bringing the total to 13%, would eliminate another 16% of the estimated $20 trillion shortfall, and 73% of Americans -- 70% of Republicans and 78% of Democrats -- are in favor of that change, according to the University of Maryland.
Reduce costs by cutting Social Security benefits
The other two proposed changes to delay trust fund depletion would reduce costs associated with the Social Security program. There are many ways to do that, but they all involve cutting benefits in one way or another. The two proposals involve raising the retirement age or cutting benefits for high-income retirees.
Raise the full retirement age: Under the current law, eligibility for Social Security retirement beings at age 62, but retirees do not receive their full benefit unless they wait full retirement age (FRA) to claim Social Security. At the present time, FRA ranges from age 66 to age 67, depending on birth year, but increasing FRA to age 68 would eliminate another 14% of the estimated $20 trillion shortfall. According to the University of Maryland, 75% of Americans -- 75% of Republicans and 76% of Democrats -- are in favor of that change.
Cut benefits for high-income beneficiaries: Under the current law, Social Security benefits are based on the average inflation-adjusted earnings from the 35 highest-paid years of a person's career. That means workers that make more money get larger Social Security benefits when they retire.
On one hand, high earners pay more tax dollars into the Social Security program, so it seems logical that they should receive a larger benefit. On the other hand, high earners are more likely to have larger sums of money saved in retirement accounts, meaning they are probably less dependent on Social Security income than low earners.
According to the University of Maryland, 81% of Americans -- 78% of Republicans and 86% of Democrats -- are in favor of reducing benefits to the top 20% of earners. High earners would still receive a larger Social Security benefit than low earners, but the discrepancy would be less pronounced. That change would eliminate another 11% of the shortfall.
Change will likely take time
The changes discussed in this article would collectively reduce the $20 trillion shortfall by 102%, meaning they would keep the trust fund solvent for at least the next 75 years. But the wheels of change turn slowly in Washington, so current beneficiaries shouldn't expect any big modifications to the Social Security program in the near future.
