Social Security is an important program that sustains millions of seniors. Without it, many retirees would no doubt struggle to cover even their basic expenses.
But Social Security is running into some financial issues. In the coming years, it expects to owe more in benefits than it collects in revenue. That's a problem lawmakers need to address to prevent benefit cuts.
Another issue with Social Security is that its annual cost-of-living adjustments, or COLAs, have failed to adequately keep pace with inflation for many years, even though they're based on inflation data. Because of this, seniors on Social Security have consistently been losing buying power over the years.
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Lawmakers are invested in shoring up Social Security's finances and making sure the program's annual raises don't inadvertently cause seniors undue financial stress. As such, we could see these changes to the program arrive in the coming years.
1. A different formula for COLAs
Social Security COLAs are calculated based on third-quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). But senior advocates have long argued that the CPI-W is not a good measure of the costs retirees face. Because of this, Social Security beneficiaries have failed to gain adequate buying power.
Advocates have been pushing for a different means of calculating COLAs -- specifically, a senior-specific index called the Consumer Price Index for the Elderly, or CPI-E. The goal would be to base annual Social Security raises on changes in the costs that are most likely to affect beneficiaries, like rising healthcare expenses.
2. A later full retirement age
Social Security risks having to cut benefits due to a lack of incoming revenue. One way to prevent that from happening, or allow for less extreme cuts, is to raise full retirement age, which is when seniors are eligible for their full monthly benefits based on their respective wage histories.
Right now, full retirement age is 67 for anyone born in 1960 or later. Lawmakers have proposed raising that age to 68 or 69 to help Social Security get to a better place financially. The logic is that since life expectancies have increased, encouraging seniors to delay retirement by a year or two isn't so terrible (although claiming Social Security and retiring don't always go hand in hand, they often do).
Of course, for this idea to work, lawmakers will need to make a decision soon -- and ideally, give near-retirees some sort of warning so that they can make adjustments to their plans as needed.
3. A higher wage cap
Social Security is primarily funded by payroll taxes. Each year, a wage cap is put into place for Social Security tax purposes, and earnings beyond that threshold aren't subject to those taxes.
This year, the wage cap sits at $160,200. That cap tends to rise annually to account for inflation and wage growth.
Some lawmakers think raising the wage cap could do a great job of pumping more money into Social Security. Some have even suggested eliminating it altogether so that all earnings are subject to Social Security tax.
All we can do is sit back and wait
Clearly, these Social Security changes, if they come about, are huge. And at this point, they're all a distinct possibility.
Lawmakers are well aware that Social Security is facing its share of fiscal woes, and that many seniors on the program have been struggling financially. Ideally, they'll aim to address these problems soon. That doesn't automatically mean that these changes are a sure thing. But they're all ideas that have been floated, and they're changes everyone should be gearing up for.
