Most Social Security headlines (including many of my own) warn that Social Security will soon run out of money if lawmakers don't enact tax increases or benefit reductions. So you might naturally assume that benefit increases are out of the question. However, it may surprise you to learn there's widespread support for certain types of benefit increases, even if it means higher taxes.
Different kinds of benefit increases
When we say "benefit increases," this phrase can mean several different things. For example, a benefit increase could mean:
- An across-the-board increase for all retirees. One example would be a $65 per-month increase to all beneficiaries, regardless of income, age, or any other factors.
- A change in the way cost-of-living adjustments (COLA) are calculated that would result in greater benefit increases. Social Security currently uses the consumer price index, or CPI, to calculate benefit adjustments. However, some of the costs affecting seniors (such as healthcare) tend to rise at a faster rate. Adjusting the COLA to reflect seniors' costs would ensure that the purchasing power of benefits remains the same over time.
- An increase in the minimum benefit for lower-income retirees. The current Social Security benefit for a lifetime minimum-wage worker is $8,230 per year -- well below the $11,670 poverty line. One popular proposal would increase the minimum Social Security benefit so that no retiree who paid into the system for 30 years would retire in poverty.
Support of the people
All three of these proposals are supported by the majority of the American people.
According to a study by the National Academy of Social Insurance, increasing the COLA is the favorite type of increase, supported by 80% of survey respondents. And this support was spread evenly among all income levels, age groups, and political affiliations. Similarly, increasing the minimum benefit is widely supported (72% of the population) among all demographics.
Across-the-board increases are the least-favored solution. Though they're supported by a majority (62%) of the population, there's a significant drop in support among individuals who earn $100,000 or more (48%) and Republicans (54%). So an across-the-board increase might not gain much political traction.
How much would it cost?
Increasing Social Security benefits would certainly add to the program's funding requirements, but not by as much as you may think. And so long as the revenue-generating changes made to Social Security make up for it, it's possible to increase benefits while fixing the current funding problem at the same time.
According to the NASI survey I referenced earlier, here's how certain Social Security increases would affect the projected funding shortfall:
- An across-the-board $65 per-month increase in Social Security benefits would add 29% to the funding shortfall.
- Increasing the COLA to accurately reflect seniors' cost of living would add 14%.
- Increasing the minimum benefit so no worker who pays into Social Security for 30 years ends up retiring in poverty would add 9% to the shortfall.
However, the other potential changes would more than make up for that shortfall:
- Gradually eliminating the Social Security tax earnings cap over a 10-year period would fix 74% of the shortfall.
- Raising the payroll tax rate from 6.2% to 7.2% for employers and employees over a 20-year period would take care of 52% of the projected shortfall.
Of course, there are other proposed solutions, such as raising the retirement age or means-testing Social Security benefits. However, the point is that as long as the mathematics work out to at least 100% of the shortfall, Social Security can be increased and fixed at the same time.
For example, the survey found that the most popular combination of changes would eliminate the earnings cap and raise the payroll tax (reducing the deficit by a total of 126%) while also increasing the COLA and minimum benefit (adding a total of 23% to the deficit). Adding these percentages together, it's easy to see how this hypothetical reform package would create adequate funding for promised Social Security benefits and the proposed increases.
Will we see increases?
I'm pretty confident that an increase in the minimum Social Security benefit amount and a modification to the cost-of-living adjustment will be a part of any reform package that makes its way through Congress. This type of increase has plenty of support from the American public throughout all age groups, income levels, and political affiliations.
An across-the-board increase is another matter, and it largely depends on who's in the White House and which party is in control of Congress at the time of the reforms. However, with the level of importance most people place on the Social Security program, higher Social Security benefits for all Americans look like a real possibility.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.