Source: Social Security Administration.
When it comes to Social Security, there are countless articles warning us that the Social Security trust fund will run out of money soon and outlining changes we can make to shore the system up.
But why stop with simply keeping Social Security running? Instead of discussing ways to make the system solvent, preserving its current degree of usefulness to retired American workers, why not enact some changes to make it even stronger? Why not aim for more Social Security?
The need
That might seem like a wild suggestion, but here's why it's not: According to the 2014 Retirement Confidence Survey, 60% of American workers have less than $25,000 saved for retirement (excluding the value of their home), and 36% of American workers have less than $1,000 saved for retirement. Not surprisingly, only 57% of American workers (or their spouses) were saving for retirement in 2014, down from a recent peak of 65% in 2009, and fully 73% of American workers have no retirement plan. A study by the Center for American Progress reported that 31% of Americans have no retirement savings at all and no pension.
Get the picture? It's grim. You may think Social Security is the solution to this problem, but consider this: Last month, the average monthly retiree benefit was just $1,328. That amounts to about $16,000 per year. How comfortably could you live on that? And what if the actions taken to shore up the Social Security system left it paying out less than current levels of benefits? Or what if no actions were taken, leaving its trust fund insolvent by the 2030s and reducing payments by about 25%?
Right now, Social Security is designed to provide about 40% of retirees' pre-retirement earnings. The Social Security Administration itself notes that per many experts, retirees will generally need about 70% of that income -- almost twice as much. (It's higher for lower-income workers and vice versa.) Imagine a Social Security program that provides, say, 60% or 70% of pre-retirement income. It could wipe out a lot of stress and worry across the nation.
It's not a stretch to consider increasing the size of Social Security in order to make up for Americans' poor retirement planning. So how might Social Security be bolstered? The currently proposed fixes are a great starting point. Used in combination, they could conceivably make Social Security a greater retirement-income supplement than ever.
Let's go over some of the more basic proposals.
Raise the retirement age
In the eyes of the Social Security Administration, the full retirement age for those born in 1960 or later is 67. For those born in 1937 or earlier, it's 65, and for those born between 1937 and 1960, it's somewhere in between. In other words, an upward adjustment has already been made, from 65 to 67.
One suggested fix for Social Security is to raise the retirement age further. That's not the most popular option, though Americans' rising life expectancies make it more palatable for some, and many Americans will have to work longer anyway in order to save for retirement. A Washington Post article suggested that raising the retirement age along with Americans' longevity could cut the shortfall by 20%.
Increase the tax
Right now, our income (up to a set amount) is taxed at 12.4% for Social Security, with salaried folks paying 6.2% and their employers paying the other 6.2%, while self-employed people shoulder the entire burden. That tax could be increased, significantly boost the system's revenue. It wouldn't be popular, but the trade-off could be well worth it if retired workers face less financial hardship as a result. The promised retirement income for Social Security beneficiaries will be higher, compensating for the tax. One suggestion has been to raise it to 15.3%, which could wipe out the expected shortfall entirely.
Removing the earnings cap
Right now, everyone is taxed on their earnings up to a set cap that's adjusted every year. In 2014, it was $117,000, and in 2015, it's $118,500. Many people see this system as unfair, because those who earn less than the cap are taxed on all of their earnings, while those who earn more see some or much of their income go untaxed. In 2015, for example, someone fortunate enough to be earning $1,118,500 will have a full million dollars excluded from the Social Security tax. Removing the cap and simply taxing all earnings at the same rate seems more fair to some and would increase the system's revenue. This fix alone would be expected to close the shortfall entirely.
As you can see, enacting a combination of these proposals (or others) could actually result in greater Social Security benefits for retirees, not the current level or lower. Some solutions are more economically or politically feasible than others, but in any case, we need to move the conversation beyond how to save Social Security and toward how to improve this vital program.
Source: Social Security Administration.
