Social Security, the program designed to provide a financial foundation to retired workers during their golden years, is only expected to replace about 40% of a worker's wages, at least according to suggestions from the Social Security Administration. Yet surveys from national pollster Gallup suggest that its importance may go far beyond that figure.
When questioning today's retirees in 2015 as to how much they rely on Social Security, a whopping 59% considered it a "major source," with another 31% considering it a "minor source" of income. Nonetheless, about three-in-five seniors would presumably be in deep financial trouble without this coveted entitlement program, and nine-in-10 seniors could struggle to meet their monthly expenses without Social Security.
The good news is the program has been paying out benefits to seniors, as well as disabled persons and survivors of deceased workers, for more than 75 years. But the bad news is the program is on a path to disaster.
Social Security's path to problems
According to the 2015 Board of Trustees Report, the Old-Age, Survivors and Disability Insurance Trust is slated to burn through its existing cash reserves in less than two decades. By 2020, outgoing benefit payments will outpace the combination of revenue being brought in via payroll taxes and interest earned on existing cash reserves. If the Trust should be depleted, it could necessitate up to a 21% reduction in benefits to keep the program solvent for another 55 years.
To be clear, this doesn't mean Social Security is going bankrupt, but it does imply that benefits could be cut substantially in the future. That's worrisome considering how reliant today's seniors and pre-retirees are, and are expected to be, on the program.
What's causing Social Security's woes?
First, baby boomers are retiring at a pace of about 10,000 per day, and will be doing so for about the next 15 years. As these new beneficiaries leave the workforce, there simply aren't enough new workers (and payroll tax revenue) to take their place and keep the worker-to-beneficiary ratio from falling. By 2035, the worker-to-beneficiary ratio is expected to reach 2.1-to-1, or 25% lower than where it was in 2015.
Secondly, people are living longer than ever. On one hand that's great news for seniors who want to enjoy their retirement. On the other hand, this means many years of added payments that's further draining the OASDI.
When it comes to fixing Social Security, numerous ideas abound, although lawmakers haven't been able to come to a consensus as to how best to fix the program.
A popular solution among the public is to raise or eliminate the earnings payroll tax cap. Workers and their employers currently pay into the Social Security program on earned income up to $118,500 (as of 2016), however, any income beyond this point is free and clear of taxation. This means most Americans pay into the program during the entire year, whereas wealthier individuals escape paying tax to the Social Security program on all income beyond $118,500. Raising or eliminating the payroll tax cap would shift the tax burden toward well-to-do individuals who can presumably afford to pay more.
Another fix offered is to raise the full retirement age. Since people are living longer than ever, it could make sense to raise the point at which retirees would be entitled to 100% of their benefits. Moving the full retirement age higher could encourage people to work longer and wait to retire, which may lessen the burden on the Trust and provide more payroll tax revenue for the program.
Even adjusting the way benefit increases are calculated has been proposed to fix Social Security. Currently the CPI-W, which covers tens of millions of urban wage earners and clerical workers, is used to calculate year-to-year changes in Social Security benefits. However, what workers spend their money on isn't necessarily reflective of where seniors spend their money – and two-thirds of Social Security benefit recipients are seniors. Using the Consumer Price Index for the Elderly, or CPI-E, could ensure seniors get more accurate inflationary benefit increases.
The stupid simple solution that's being overlooked
Yet for all of the solutions offered, one stupid simple solution that would extend the solvency of Social Security for almost 75 more years keeps being overlooked.
According to the Board of Trustees 2015 Report, the long-range actuarial deficit as a percentage of taxable payroll for the OASDI is 2.68%. This is comprised of a 0.31% actuarial deficit for the Disability Insurance Trust, and a 2.37% actuarial deficit for the Old-Age and Survivors Insurance Trust.
In plainer English, all this means is the Social Security program needs a cumulative 2.68% tax increase on top of its current 12.4% payroll tax in order to avoid a cash shortfall and benefit cuts. For most people, this would entail a 1.34% increase in personal Social Security tax liability and a 1.34% increase for their employer (the 12.4% is split evenly among employee and employer). Self-employed persons would see their Social Security tax liability increase from 12.4% to 15.08%.
Seriously, it's that simple. Raise payroll taxes by 2.68%, and based on economic assumptions offered by the Board of Trustees we shouldn't have to worry about the solvency of the program for multiple decades.
Now I know what you might be thinking: "Good luck getting the American public to agree to another tax hike!" And you're right -- tax hikes are typically like kryptonite to Americans and their families. But when it comes to shoring up Social Security, most are willing to make an exception.
In 2013, a survey conducted by the National Academy of Social Insurance found that nearly eight-in-10 Americans believed it was "critical" to support Social Security, even if it meant Americans having to pay more in taxes. It should be noted that these survey-takers also believed the wealthy should pay more, cost-of-living adjustments should be increased, and ultimately that higher contributions via taxation should result in bigger benefits down the road. Whether these "catches" are in the cards is unknown, but this survey demonstrates Americans' desire to support Social Security.
Further, three separate Gallup polls (conducted in 2005, 2010, and 2015) have consistently shown that Americans would prefer tax increases over benefit cuts. In last year's survey 51% of respondents noted their preference for tax hikes to fix Social Security compared to just 37% who chose to reduce benefits. Some 12% of respondents offered no opinion.
Taxpayers aren't going to break out the champagne if Social Security taxes are raised, but when it comes to preserving the benefits of the program, the longer Congress waits, the bigger the tax increase needed is likely to be. With Americans seemingly behind the idea of preserving Social Security's benefits, it makes you wonder what lawmakers are waiting for?
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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