Social Security is a critical program designed to financially protect low-income retirees, the disabled, and survivors of eligible beneficiaries. According to the Social Security Administration, Social Security benefits comprise 38% of the income of the elderly. This total is even higher for nearly half of all elderly unmarried beneficiaries, who get 90% or more of their income from Social Securty.
Unfortunately for future and even current beneficiaries, the Old-Age & Survivors Insurance Trust Fund and the Disability Insurance Trust Fund are running out of reserve cash. OASDI cash reserves are on track to be depleted by 2033, at which point benefits will be cut by 23% if nothing is done to rectify this reserve depletion. American legislators, economists, and retirement experts have proposed a broad range of solutions to prevent drastic benefit cuts.
With this in mind, we asked four of our top retirement analysts which proposed Social Security fixes they believe simply won't work. Here's what they had to say.
According to a report by the Center for Retirement Research at Boston College, a 13% across-the-board cut to Social Security benefits would solve the trust fund's problems for the next 75 years. However, I fear that an action like this would do a lot more harm than good.
Specifically, a cut of this size like this would have a substantial impact on the lives of current retirees and soon-to-be-retired workers. Social Security benefits represent about 38% of the income of individuals 65 and older, and a significant percentage of the elderly (22% of married couples and 47% of singles) rely on Social Security for more than 90% of their income.
In other words, such a benefit cut would require millions of pre-retirees to overhaul their retirement plans. Many people rely on a combination of Social Security and retirement accounts to provide them with enough money to see them through retirement. A drastic cut to Social Security benefits would leave many people with a shortfall that would require them to either work longer or cut back on their retirement lifestyle.
The best solution to fix Social Security remains to be seen, but I don't believe an across-the-board cut is the best way to go.
Policymakers have made many proposals to fix Social Security's future funding shortfall, but some of them simply aren't politically viable. One of the more outlandish suggestions is that the government could divert money from other revenue sources, such as the estate tax, in order to shore up Social Security's outflows.
The problem is that Social Security is already one of the biggest programs that the government runs, second only to Medicare and other health-related programs. With Social Security taxes earmarked directly for the program, most Americans would find it hard to believe that taking 6.2% from their wages and an equal amount from their employers does not cover the meager benefits that Social Security provides. By suggesting that money come from the government's general fund, legislators would appear to be simply ducking the issue, as it would have the same impact as raising Social Security taxes while allowing legislators to avoid imposing new taxes.
Social Security has historically been a largely self-supporting program. Changing that aspect of Social Security could further endanger its viability by making it open to more political budget bickering in the future.
One of the most popular proposals to fix Social Security is to raise the payroll tax earnings cap.
In 2015, the payroll tax caps at $118,500, up modestly from $117,000 in 2014. This means that every dollar up to $118,500 is subject to the Social Security payroll tax of 12.4%, half of which you pay and half of which is the responsibility of your employer. Every dollar earned beyond $118,500 is not subject to taxation from Social Security.
In a recent poll, many Americans suggested that raising this payroll tax cap would make sense, considering that many upper-income earners could easily afford to pay higher taxes into the system. Further, raising the payroll tax would only affect a small percentage of the population, given that median household income is about $52,000.
Unfortunately, I don't think this is that smart of a solution. At best, it's one aspect of a much broader solution.
For one, raising the payroll tax cap on earnings eliminates only 40% of the earnings shortfall in even the most optimistic scenarios. It pretty much ensures that other solutions need to be examined, otherwise a benefits cut is in the cards whether we want one or not.
Further, because Social Security benefits cap at a certain level, high earners won't necessarily benefit from paying extra money into the system when they eventually begin to collect benefits. True, upper-income Americans may not need Social Security benefits as much as most Americans, but paying more into the system and seeing no additional benefit is likely to anger this group.
One possible fix to Social Security that simply won't work is tying the annual cost-of-living adjustment to a slower-growing measure of inflation.
Currently, the Social Security Administration updates Social Security benefits once a year based on the change in the Consumer Price Index. Many economists argue that the CPI overstates the rate of inflation compared to what consumers actually experience and that other measures of inflation, like the Chained CPI or the Personal Consumption Expenditures inflation rate, are closer to the "reality" experienced by consumers.
This cost-of-living adjustment simply won't work because it would hit hardest the people who need Social Security most: the people who end up living the longest. Their benefits would see the biggest cumulative benefit cut, as they would end up receiving the most cost-of-living adjustments.
Further, by targeting those who live the longest, this proposal runs counter to the reason Social Security was first established -- that is, to provide basic income to those who live past the average life expectancy.
Finally, this fix to Social Security would also have too small an effect to be truly worthwhile. The Center for Retirement Research at Boston College estimated that switching to a revised CPI would only cut the 75-year funding gap for Social Security by 25%. There are better ways to fix Social Security than targeting those who need the payments most.