The sands in the hourglass counting down the days until Social Security goes insolvent just sped up their downward fall. Last year, the Social Security Trustees projected that the program's combined trust funds would run out of money in 2035. Their latest report, though, lowered the estimated date by one year to 2034.
However, the Trustees' gloomy predictions only apply if nothing is done to fix Social Security. Politicians in Washington, D.C., certainly know the backlash they'll experience if they do nothing. Because of this, huge changes to Social Security are likely on the way at some point. Here's how the top alternatives compare.
Image source: Getty Images.
Increase revenue
Several potential changes to preserve Social Security would increase revenue for the program. Some involve changing the benefit base, which is the amount of annual income subject to payroll taxes and credited toward future benefits. It's currently set at $160,200, and others relate to increasing taxes in other ways.
Below are some potential changes that have been discussed, along with how much of Social Security's projected shortfall would be eliminated by enacting each.
| Proposed Change | Shortfall Eliminated |
|---|---|
| Eliminate base and provide no additional benefit credit | 75% |
| Eliminate base and provide benefit credit for all earnings | 58% |
| Increase base to 90% of earnings and provide benefit credit up to the new limit | 20% |
| Tax all earnings >$250K and provide some benefit credit on the earnings | 70% |
| Tax all earnings >$400K and provide some benefit credit on the earnings | 64% |
| Tax employee and employer premiums for health insurance | 34% |
| Apply 16.2% tax on investment income as defined in the Affordable Care Act | 29% |
| Increase payroll tax from 12.4% to 16% | 103% |
Data source: Social Security Administration. Chart by author.
Change retirement age
One way Social Security's fiscal challenges have been addressed in the past was to increase the full retirement age (FRA), also sometimes called the normal retirement age, gradually from 65 to 67. There are several similar ideas that could be considered to prevent the program from going insolvent in 2034, including the following:
| Proposed Change | Shortfall Eliminated |
|---|---|
| Increase FRA by one month per year until it's 68 | 12% |
| Increase FRA by two months per year until it's 69, then increase by one month every two years | 38% |
| Increase FRA and EEA -- which is currently 62 -- by three months per year until FRA is 69 and EEA is 64 by 2030 | 25% |
Source: Social Security Administration. FRA = full retirement age. EEA = earliest eligibility age. Chart by author.
Change cost-of-living adjustment (COLA)
Social Security recipients' cost-of-living adjustment (COLA) in 2023 is the biggest in over four decades. Changing how these COLAs are calculated could impact Social Security's finances. Here are a few of the potential options:
| Proposed Change | Shortfall Eliminated (Increased) |
|---|---|
| Reduce annual COLA by 0.5% | 29% |
| Change calculation to use Chained CPI (reducing annual COLA by 0.3%) | 18% |
| Change calculation to use CPI-E (increasing annual COLA by ~0.2%) | (12%) |
| Add 1% to annual COLA for recipients age 85+ | (3%) |
Source: Social Security Administration. Chained CPI = Chained Consumer Price Index. CPI-E = Consumer Price Index for the Elderly. COLA = cost-of-living adjustment. Chart by author.
The idea of changing how Social Security COLAs are calculated to use the CPI-E has gained some support. This inflation metric more accurately measures the price increases experienced by seniors than the current CPI used to calculate COLAs.
Change benefits
There could also be some alternatives on the table for increasing or reducing Social Security benefits. Some potential options on this front include:
| Proposed Change | Shortfall Eliminated (Increased) |
|---|---|
| Reduce 50% spouse's benefit by 1% per year until it is 33% | 3% |
| Change surviving spouse's benefit to 75% of the sum of the survivor's benefit and the deceased spouse's benefit (if it's higher than the benefit using the current calculation method) | (3%) |
| Increase the minimum benefit to 125% of the poverty level for all Social Security recipients with 30 years of coverage | (5%) |
| Reduce benefits by 5% for all future retirees | 18% |
| Reduce benefits for higher-earning retirees, starting in 2030 | 23% |
Source: Social Security Administration. Chart by author.
The most likely changes
You might have noticed that only one of the potential changes referenced above eliminates the projected Social Security shortfall. And that change -- a big increase to the payroll tax -- would almost certainly encounter widespread opposition.
What if the president and Congress do nothing? Only one percentage will matter to Social Security recipients: 25.2%. That's how much the Social Security Trustees say benefits will have to be cut if no action is taken before 2034.
In the meantime, the best thing for future retirees to do is to continue socking away money into 401(k) and IRA accounts. That's a smart move regardless of what happens with Social Security.
If you're already retired, you don't need to worry. There will probably be multiple changes to Social Security to avoid insolvency. These changes will likely include increases to revenue (such as raising the benefit base) and reductions of the program's costs (perhaps gradually increasing the FRA) to garner bipartisan support.
Social Security certainly needs fixing. But there's still enough sand in the hourglass for changes to be made.
