10 Potential Social Security Changes to Watch

Social Security has been around for a long time, but just as the program has evolved in the past, we could see some changes in the not-so-distant future, for better as well as for worse. Here are a bunch of potential changes to look out for as Social Security grapples with financial uncertainty and aims to stay afloat.

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Social Security relies on payroll taxes as its primary revenue source, but in the coming years, it expects to take in a lot less revenue as baby boomers exit the workforce in short order. In fact, the program expects to owe more money in benefits in the coming years than it collects. For now, Social Security can tap its trust funds to compensate for a revenue shortfall, but once those trust funds run dry, benefit cuts may be on the table. And as per the latest Social Security Trustees report, those trust funds are expected to run out of money within the next 15 years.

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Social Security clearly needs to either raise revenue or cut costs to avoid a major financial crisis. One way to achieve the latter is to raise full retirement age, or the age at which seniors can collect their monthly benefit in full. Right now, full retirement age for anyone born in 1960 or later is 67, but proponents of this solution feel that because life expectancies are rising, raising full retirement age is a reasonable idea to consider.

As just mentioned, Americans are indeed living increasingly longer lives. Another solution to free up cash for Social Security is to implement longevity indexing, where benefits would be modified to pay smaller amounts as lifespan projections increase. This could involve changing the formula used to calculate benefits.

The concept of means testing isn't new; it's used to determine eligibility for Chapter 7 bankruptcies. But it's a concept that's yet to be introduced to Social Security. What it would do is effectively dish out benefits based on financial need so that higher-income seniors would get less money then lower-income seniors.

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Higher earners don't pay Social Security taxes on all of their income. There's a wage cap in effect that changes from year to year, and in 2020, it's $137,700, which means earnings beyond that point aren't taxed for Social Security purposes. To raise more revenue for Social Security, some lawmakers are pushing to raise the wage cap so that a higher level of earnings is subject to taxes.

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Raising the wage cap would easily pump more money into Social Security, but for some lawmakers, that’s not enough -- they want to see the wage cap eliminated entirely. Those opposed to this idea, however, argue that since Social Security has a maximum monthly benefit, it's not fair to cap one end of the equation but not the other.

Right now, the Social Security tax rate is 12.4% of earnings up to the wage cap. Those who don't work for themselves pay 6.2% of that tax while their employers pick up the second half of that tab. Self-employed individuals, meanwhile, pay the entire 12.4%. Increasing that 12.4% payroll tax rate could help raise additional revenue for Social Security to avoid a funding shortfall.

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is the current index used to calculate annual cost-of-living adjustments (COLAs) for Social Security beneficiaries. But some lawmakers have argued that the chained CPI is a better measure to use, since it accounts for the fact that consumers will react to rising prices by substituting goods and services for lower-cost alternatives. The chained CPI would actually result in lower COLAs for seniors, despite the fact that many Social Security beneficiaries struggle with their current raises.

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The purpose of COLAs is to help Social Security beneficiaries retain their buying power in the face of inflation, but senior advocates have long argued that the CPI-W is an imperfect measure to base them on, since it largely does not reflect the expenses that tend to burden seniors the most. As such, they’ve argued that COLAs should be based on an alternate index: the CPI-E, or Consumer Price Index for the Elderly, whose data would reflect costs that are more specific to seniors.

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Currently, Social Security benefits are calculated based on workers' average monthly wages, indexed for inflation, over their 35 highest-paid years of income. Changing the formula to include more working years would likely result in lower benefits for seniors, since early wages would be taken into account. That's a bad thing for beneficiaries, but a cost-saving measure for a program that's clearly desperate for money.

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