Here's How to Save Social Security

Without Social Security benefits, a staggering 38% of older adults would have incomes below the poverty line, all else being equal... -- Kathleen Romig, Director of Social Security and Disability Policy, Center on Budget and Policy Priorities

Clearly, Social Security is a critical program for Americans. But a big problem is looming: If nothing is done to shore up the program, Social Security's trust funds' surplus will run out around 2033, which will result in benefits shrinking to about 77% of the amount due to beneficiaries. Yikes, right?

Image source: Getty Images.

How did Social Security end up in jeopardy?

Remember that Social Security, signed into law by President Franklin Roosevelt in 1935, works by collecting taxes on workers' earnings and then paying out benefits to retirees. It's a system that has worked well for many decades, as there have long been many more people paying into the program than collecting from it. Indeed, Social Security has long run a surplus.

But over time, many people have been retiring earlier than people used to and also living longer than people used to. This has shrunk the ratio of covered workers (those paying taxes into the program) to beneficiaries (those collecting benefit checks).

Check out the table below, showing how the ratio has changed:

Source: Social Security Administration.

The shrinking ratio has caused the surplus to be tapped, and it's estimated by Social Security's trustees that

The Old-Age and Survivors Insurance (OASI) Trust Fund will be able to pay 100% of total scheduled benefits until 2033... At that time, the fund's reserves will become depleted and continuing program income will be sufficient to pay 77% of scheduled benefits.

In other words, within a few years, money coming into the program won't be able to cover obligations. So if nothing is done, beneficiaries expecting checks of, say, $1,000 or $2,000 will be receiving checks of around $770 or $1,540. That spells trouble for many people's retirements.

How can Social Security be fixed?

Fortunately, Social Security can be fixed! It's simply up to Congress to take action (and it can't hurt for you to let them know that you'd like them to).

Just how can Social Security be strengthened, then? Well, the two main approaches are to (a) shrink benefits or (b) increase money coming into the coffers. Many politicians and thinkers have proposed various ways to address the issue, and the Committee for a Responsible Federal Budget (CRFB) has created The Reformer -- a clever tool that lets any of us enter various proposed changes to the program to see what percentage of the projected shortfall will be closed by each of them.

Below are some of the proposed solutions, along with the percentage of the shortfall they'd cover, according to the CRFB.

Here are explanations and context for some of the proposals:

• Right now, the full retirement age for those born in 1960 or later is 67. That's the age at which you can start collecting the full benefits to which you're entitled, based on your earnings history. (You can, of course, start Social Security earlier or later, which will make your checks smaller or larger, respectively.)
• All beneficiaries get cost-of-living adjustments (COLAs) in most years. Some have proposed to give smaller increases to wealthier retirees who presumably are less dependent on benefits.
• The payroll tax for Social Security is currently 12.4%, split equally between employee and employer. (Yes, your company is chipping in as much as you are, though self-employed people pay the full 12.4%.)
• Right now, there's an earnings limit beyond which we are not taxed for Social Security. It increases regularly and is currently $168,600. So someone who earns $1,168,600 pays as much into Social Security as someone who earns $168,600. Various proposals suggest taxing all of everyone's earnings or at least more than the current cap.
• Social Security's coffers are currently invested in U.S. government bonds, which are extremely safe. They don't typically deliver great returns, though. Investing some of the funds in stocks is likely to boost returns, but it will also introduce a lot more volatility and risk.
• The average monthly Social Security benefit was only $1,913 as of March, amounting to about $23,000 over a year. But many people collect much smaller sums. Guaranteeing a minimum benefit would help them.
• Finally, some recommend means-testing beneficiaries so that those in the top 1% or so of earners would have their benefits phased out.

As you can see from the table, many of these proposals are quite powerful. If several are adopted, not only could Social Security be restored to health, but it might possibly be strengthened, so that it can better support retired workers.