There are a number of topics on the minds of Americans as we head into the November elections, but none may be more important than Social Security.
Social Security is the program providing income to nearly 60 million people each month, 40 million of whom happen to be retired workers. In addition to providing some monetary foundation to seniors in their golden years, Social Security also provides benefits to survivors of deceased workers and the disabled. Although Social Security isn't an entitlement, nearly 19 out of 20 workers are covered by the program, meaning whether you realize it or not, the future of the program probably has some bearing on you.
At the heart of the debate is the long-term stability of the program. As it stands now, the Old Age, Survivors and Disability Insurance (OASDI) Trust is set to burn through its remaining cash reserves by 2035 as a result of two major demographic shifts.
On one hand, people are living longer than ever, which is allowing seniors to draw a benefit for a longer period of time. The other issue is simply that baby boomers are retiring in greater numbers and there aren't enough new workers to replace them. As the worker-to-beneficiary ratio falls, the current cash inflow will turn into an outflow, with the ultimate result being an exhaustion of the OASDI's cash reserves by 2035. If the excess cash reserves are completely used up, a 21% benefit cut could be necessary to see the program through 2087.
Social Security's three most popular fixes
The good news is there are a lot of possible solutions to fix Social Security (more than a dozen), but the problem is that no one can seem to agree which pathway is best. Every solution comes with a possible flaw, making a fix not exactly cut-and-dried.
With this in mind, The Washington Post conducted an informal poll in 2014 that attempted to gauge the public's take on Social Security. Offering a choice of one dozen Social Security solutions, readers were allowed to select as many fixes as they'd be willing to stand behind. As you might imagine, some solutions weren't well received. For instance, doing nothing but cutting benefits 21% in 2035 and raising payroll taxes by a substantial amount were liked by a low-single-digit percentage of readers.
However, three solutions stood head and shoulders above the rest.
1. Raise the payroll tax earnings cap
The most popular solution by far is the idea of raising the payroll tax earnings cap, which 69% of readers noted they'd be willing to back. In 2016, the payroll tax, which is a cumulative 12.4% tax that's split between you and your employer (6.2% each) and paid entirely by the self-employed, is capped at $118,500 in income. This means that any income earned beyond the $118,500th dollar is free and clear of the payroll tax.
Most Americans work all year and won't reach $118,500 in income (the average household earns about $51,000 annually), so boosting the payroll tax earnings cap, or lifting it entirely, would only affect a small percentage of well-to-do individuals. Thus you can see why so many readers gravitated toward that option.
The downside? High-income earners would be required to pay more into the system, but would be unlikely to see commensurate increases in their benefits come retirement.
2. Raise the full retirement age
The second most popular Social Security fix was the idea of raising the full retirement age, which 44% of readers claimed they'd be willing to back. You'll note that there was a sharp drop-off in favorability between raising the payroll tax earnings cap and this second-place option of raising the full retirement age.
Raising the retirement age makes sense because people are living longer than ever. If the full retirement age were raised to, say, 68, 69, or even 70 years of age on a gradual basis, it might encourage people to work well into their 60s or 70s, adding additional payroll tax revenue to the OASDI, and allowing seniors to use their work income to pay their monthly expenses rather than relying on Social Security benefits. Every year an eligible beneficiary waits to claim benefits beginning at age 62 boosts their benefit by 8%.
The downside? It could potentially hurt lower-income individuals and those who aren't able to work into their golden years. Additionally, well-to-do persons tend to live longer than the poor due to their ability to afford access to medical care. Thus, raising the retirement age may ultimately help the rich more than those who need it most.
3. Adjust how cost of living is calculated
The third most popular solution, which a third of readers chose (33%), involves shifting how Social Security factors in inflation.
As it currently stands, Social Security benefits are calculated using the Consumer Price Index for Urban Wage Workers and Clerical Workers, or CPI-W. However, a proposal suggests shifting to the CPI-E, or Consumer Price Index for the Elderly, since about two-thirds of Social Security beneficiaries are seniors. The reason? The CPI-E may better reflect the spending needs of its largest recipient base.
For instance, the CPI-W tends to place a large focus on transportation costs, foods and beverage expenses, apparel, education, and communications -- most of which may not be major expenses for seniors. In contrast, the CPI-E places added emphasis on housing costs and medical care expenses, which are major cost concerns for seniors.
The downside here? Primarily it's that the CPI-W includes tens of millions of extra people in its calculations compared to the CPI-E, which only factors in people aged 62 and up. Thus, the CPI-W may actually be a better gauge of inflation than the CPI-E.
One major flaw with these three popular solutions
In their own right, each of these solutions offers something intriguing. Raising the payroll tax cap would coerce richer Americans to pay more; raising the retirement age would make people think twice about retiring too early; and shifting the cost of living adjustment to the CPI-E would ensure that the expenses of retirees bear more weight when benefit adjustments are examined annually.
But, there's a major flaw with these plans that extends well beyond their respective downsides described above: even if you combine all three, they don't fully close the cash shortfall in the OASDI.
According to research from the Center for Retirement Research, boosting the payroll tax earnings cap would only reduce the cash shortfall of the OASDI by 30%. Furthermore, increasing the retirement age would reduce the shortfall by even less (20%). Finally, the Center for Retirement Research notes that shifting from the CPI-W to the CPI-E would reduce the shortfall by another 20%. Thus, in even the unlikeliest event that all three of these popular solutions were implemented by Congress at once, they'd only curb the cash shortfall in the OASDI by 70%. Sure, that might mean an extension past 2035 for a potential cash reserve exhaustion, but it still doesn't solve the Trust's revenue shortfall.
In fact, looking through additional options offered by The Washington Post's informal poll, partially privatizing some of the OASDI Trust and investing its assets in the stock market with the intent of generating a higher return percentage would only shave off another 20% of the shortfall (this was the sixth-best solution according to readers). In essence, that's four solutions smushed together that still doesn't solve the program's cash shortfall.
Thus, it's looking more and more likely that across the board payroll tax hikes, and/or some degree of benefit cuts, may be necessary to really fix Social Security.
How would you suggest fixing Social Security? Share your thoughts in the comments below.
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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