For the first time in eight years, American voters will step into polling booths and elect a new president this November -- in case the copious number of debates and political advertisements hadn't given it away. A number of issues have dominated the debates in the early going, including the health of the U.S. economy, the senseless acts of global and domestic terrorism, and even marijuana. But when we get down to the nitty-gritty topics that are on the minds of most Americans, the topic of Social Security usually finds its way to the forefront.
Social Security is arguably the most important entitlement program in the United States. Designed to protect low-income seniors during retirement, as well as provide a financial backdrop from the disabled and survivors of deceased workers, Social Security provided benefits to nearly 60 million people in November 2015. This includes some 40 million retired workers, nearly 9 million disabled workers, and over 6 million survivors as of November 2015.
Social Security's three big issues
But Social Security is also in trouble. The latest Social Security Trustees' report suggest that the program will have exhausted its cash reserves by 2034. Should no changes be made to the Social Security program, a benefits cut of 21% would be needed to keep the program solvent until 2087.
The issues with Social Security generally boils down to three points.
First, the retirement of baby boomers is creating a major demographic shift. As more boomers leave the workforce, there simply aren't enough new workers to replace the revenue they generated via payroll taxes for the Social Security program. Between 2014 and 2040 the worker-to-beneficiary ratio is forecast to fall from 2.8-to-1 to 2.1-to-1.
Secondly, Americans are living longer than ever according to data from the Centers for Disease Control and Prevention, meaning beneficiaries could be drawing payouts for decades to come. Don't get me wrong; this is a good thing. But, looking at this from the aspect of affordability, longer life expectancies could drain the programs' cash reserves even faster.
Lastly, there's an education gap for most Americans when it comes to Social Security. Most don't have a strong understanding of the program, and thus could be leaving a lot in lifetime benefits on the table.
The struggle of how to fix Social Security for the long-term has become quite vexing, but current Democratic Party presidential candidate Bernie Sanders believes he has the solution.
How Bernie Sanders would fix the Social Security program
It should come as no surprise that Bernie Sanders' vision for fixing Social Security is markedly different than some of the prior proposals we've looked at from Republican candidates Chris Christie and Jeb Bush who've suggested raising the retirement age for everyone and/or cutting benefits for some of the wealthiest Americans (known as means-testing). Instead, Sanders has trumpeted the idea of expanding benefits for everyone, including low-income retirees. How? Look no further than the payroll tax cap.
According to Sanders, the smart way to fix the "retirement" problem we have with Social Security is by removing the current Social Security payroll tax cap. As it currently stands, income of up to $118,500 is taxed at a rate of 6.2% for you and 6.2% for your employer (if you're self-employed you pay the cumulative 12.4%). This means that any income beyond $118,500 isn't taxable by the Social Security program.
Sanders' plan is simple: remove the cap (but provide an exemption in between $118,500 and $249,999) and require those with incomes of $250,000 or more to pay their fair share (i.e., either 6.2% or 12.4% if they're self-employed). Sanders' opinion is that it doesn't make sense for the average American to pay into the Social Security program all year long while upper-income individuals pay tax on just a portion of their income.
If Sanders gets his way and the payroll tax cap is removed, he opines that the program would be able to pay full retirement benefits for another 50 years, average benefits would increase by $65 per month, cost-of-living adjustments would be met to ensure that seniors can keep up with the rising costs of medical care, and that many low-income seniors who are currently living on annual incomes below the poverty line could be moved to or above the poverty line.
Perhaps the biggest selling point of Sanders' proposal is that it's the plan most Americans support. An informal poll from The Washington Post in 2014 that allowed respondents to choose as many as a dozen solutions to fixing Social Security as they felt would work, showed that 70% of respondents believed raising the earnings tax cap was the best move. Coincidentally, it's also the move that would affect the smallest number of people, since a relatively low percentage of American taxpayers earn more than $250,000 per year.
Would it work?
Of course, the big question is whether or not Sanders' Social Security fixes would work.
On one hand there's obvious support for removing the payroll tax cap among working-class Americans, and the added taxes collected would likely improve the cash reserve outlook of the Social Security program.
However, there are a number of unanswered questions that could bring the viability of Sanders' proposal into question.
For starters -- and to be fair, this is very common of political candidates early in the election cycle -- we haven't seen any specific calculations from Sanders on how exactly lifting the payroll tax cap improves the solvency of the program to 2065. We've also not seen any specifics on how much it'll cost to boost the benefits of retirees currently living below the poverty line. This doesn't mean the numbers don't add up, so much as Sanders has only laid out the outline of his plan and not the nuts and bolts. Look for more specific data as his presidential campaign evolves and the field dwindles a bit. Only then can we make a good determination of whether or not the numbers make sense.
The far bigger issue concerns removing the payroll tax cap. Upper-income earners would probably have an issue with paying more into a program that they aren't likely to see commensurate benefits from for their considerably stepped up contribution. Upper-income earners are also some of the top job creators in this country, so boosting taxes on these individuals could actually wind up hurting hiring from small to large businesses. But, the biggest issue appears to be that it doesn't fix the problem in its entirety. The Center for Retirement Research estimates that raising the earnings cap only relieves about 30% of the expected financial shortfall needed to keep full retirement benefits unchanged by 2034.
As noted above, this isn't an easy fix, and every solution seemingly comes with just as many pitfalls as benefits. Clearly something should be done to protect benefits for seniors, but it's looking likely that some combination of added revenue and cost-cuts may be needed to bridge the projected budget shortfall. The good news is that we still have 18 years to solve this problem, but that's little solace to current retirees and pre-retirees who are relying, or expected to rely, on Social Security for a substantial portion of their income during retirement.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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