It's hard to overstate Social Security's importance to the tens of millions of Americans who rely upon it. Nearly nine out of 10 people 65 and older are receiving these monthly checks, and for more than a third of these retirees, the program provides at least half their monthly income. That makes Social Security's looming solvency crisis all the more alarming.
The latest Social Security Trustees Report estimates the government will need to make a minimum 20% cut to benefits in 2034 if the funding shortfall isn't addressed. But like most big issues in politics, finding a solution hasn't been easy. Recently, a pair of economists proposed a new idea that could fill most of Social Security's funding gap -- but it comes at a price.
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Say goodbye to your 401(k) and IRA
Andrew Biggs and Alicia Munnell, authors of the paper from Boston College's Center for Retirement Research, argue the U.S. government should abolish the favorable tax treatment given to 401(k) and IRA accounts. This would make all future contributions and earnings associated with these accounts subject to taxes, which they estimate would generate roughly $185 billion per year. Then, the government could use this extra cash to fund Social Security.
They claim the tax breaks Americans currently receive for making 401(k) and IRA contributions aren't doing what they were originally intended to do -- increase the number of people saving for retirement. High earners reap the bulk of these tax advantages while too many low earners lack sufficient income to save for retirement in any account.
Perhaps expecting the pushback they've received since publishing their brief in January, the authors suggested compromises for those who like the idea of a solution to Social Security's solvency issues but aren't ready to completely get rid of tax-advantaged retirement accounts. The paper mentioned as one option capping the amount of annual tax-advantaged savings, possibly at $10,000 or $20,000 per person. It also discussed eliminating the tax breaks for these accounts once someone's total retirement savings exceeded $500,000 or $1 million.
It's just one possibility of many
Though Biggs and Munnell's proposal is attention-grabbing and even alarming to some, it's important to recognize that at this point, it's just that: a proposal written by a couple of respected scholars who have worked in government but hold no official posts right now. So far, no one in government has suggested employing these strategies to cover Social Security's funding gap.
The program's future is far from clear at the moment, but members of Congress have proposed all manner of moves to help bring its funding and obligations into balance, including:
- Eliminating the ceiling on income subject to Social Security payroll taxes ($168,600 in 2024).
- Increasing the Social Security payroll tax rate (currently 12.4%, split evenly between employee and employer).
- Raising the full retirement ageat which workers will become eligible for their full benefit based on their work history (currently 66 to 67 for those who are still working).
- Reducing the annual cost-of-living adjustments (COLAs) that help Social Security keep pace with inflation.
- Reducing benefits for high earners.
So far, there's no clear front-runner among these proposals. It's likely that ultimately, whatever plan is passed by Congress will include a combination of strategies rather than just one. But there's no way of knowing what the program will look like beyond 2034 until the government passes the necessary legislation.
This is a tough pill for today's workers to swallow, in part because it makes it difficult to determine what they'll need to do to effectively prepare for their own retirements. Obviously, saving as much as you can on your own will always be helpful. And remaining in the workforce a little longer could also help in several ways.
First, it'll give you continued access to a steady paycheck and may allow your existing retirement savings to grow even more. It could also boost your Social Security checks since the government bases your benefit on your earnings from your 35 highest-earning years. Since most people earn more money later in their careers, delaying retirement typically increases the size of a person's benefit. This likely won't change even if the government does alter Social Security.
Once the proposals for keeping Social Security solvent become official, millions will have to adjust their retirement strategy accordingly. But if you want to make your thoughts known, contact your representatives Congress and let them know what you'd like to see happen with Social Security -- or what you don't want to happen -- and urge them to take action before major benefit cuts become unavoidable.
