One thing to keep in mind about Social Security is that the money you contribute now through payroll taxes is not really “yours” in the sense that it goes into a fund with your name on it. It’s already being spent on payments to current beneficiaries.
This system has worked well enough over the decades, thanks to the fact that there are more working people than retirees. But over time it has become less sustainable as people live longer, which increases the number of Social Security beneficiaries. It’s a particular problem now, with the baby boomer generation hitting retirement age and filing for benefits.
Boomers not only represent a large chunk of the population — many also worked a long time at high wages, which means their Social Security payments will also be comparatively high. The result is that one of the Social Security trust funds that built up while boomers worked is becoming depleted now that many are retired.
The Old Age and Survivors Insurance (OASI) Trust Fund is expected to run out of money as early as 2032 or 2033, leaving Social Security solely reliant on payroll taxes for funding — and those taxes only cover about 77% of current benefits.
This problem is not going away, experts say. That’s why many lawmakers, think tanks, senior advocacy organizations and policy advisors are trying to come up with ways to modernize Social Security so it is more financially sustainable over the long haul.
In April, the AARP published a blog listing nine ways to strengthen Social Security. These ideas ranged from conventional fixes like raising the retirement age and increasing payroll taxes to less conventional ideas such as the following:
- Broaden the taxpayer base by bringing newly hired state and local pension workers into the Social Security system, which would create a major new source of funding through additional payroll taxes.
- Expand the definition of “income” to include sources not currently subject to Social Security payroll taxes, such as the value of employer-sponsored group health insurance.
- Vary Social Security payments based on wealth by adopting a “means testing” approach that would provide progressively lower benefits to wealthier individuals.
Earlier this week, Bloomberg had experts weigh in on ways they would make Social Security more sustainable. Alicia Munnell, director of the Center for Retirement Research at Boston College, suggested an “infusion of general revenues” out of income tax receipts to cover the cost of scheduled Social Security benefits.
An option mentioned by Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget, is to increase the amount of wages subject to Social Security payroll taxes, which is currently $160,200 or less.
“Historically, that wage cap has covered up to 90% of wages; today it covers more like 83%,” Goldwein told Bloomberg.
Shai Akabas, director of economic policy at the Bipartisan Policy Center, told Bloomberg that gradually increasing the full retirement age would be a “huge boon” to Social Security. Currently, the FRA is either 66 or 67 years old, depending on your birth year.
“A recent analysis by the Urban Institute showed that increasing the retirement age by just two years over a 23-year phase-in period would close nearly a quarter of Social Security’s long-range shortfall,” Akabas said.
On the benefits side, American Enterprise Institute senior fellow Andrew Biggs floated the idea of scaling back the maximum Social Security benefit over time so that eventually every retiree receives the same benefit. Biggs also recommended increasing the minimum benefit over the short term to “guarantee against poverty.”
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