Social Security Experts: Is a Permanent Solution to Solvency Possible?

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Most Americans approaching retirement age are probably aware that Social Security will lose a major funding source in a decade or so. That source, the Old Age and Survivors Insurance (OASI) Trust Fund, is expected to run out of money as early as 2033, according to the latest Social Security Trustees report. When that happens, the program will be solely reliant on payroll taxes for funding — and those taxes only cover about 77% of current benefits.

The Social Security Administration addressed its solvency issues in a recent paper from the agency’s Office of the Chief Actuary. In that paper, the SSA provides links to proposals and options provided by policymakers and other experts that address the long-range solvency problem.

Although the looming funding shortfall will pose a challenge to both policymakers and Social Security recipients — who could see their benefits reduced — there are a ways to solve the problem.

As The New York Times noted in a recent opinion piece, Congress “won’t stand by idly as Social Security checks are slashed” by 23% or 25%. You can expect a solution in the next few years.

The only questions are “what it will look like and how long it will be intended to last,” according to the NYT. “The gap between projected revenues and expenses keeps widening as far out as the eye can see, so the size of the tax hike or benefit cut that’s needed today is bigger for a long-term fix than for a short-term fix.”

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How Social Security Funding Works

Before diving into the current proposed solutions for the Social Security crisis, it’s helpful to take a look at how the federal government funds Social Security. In simple terms, Social Security dollars come from dedicated payroll tax, which is paid by employers and employees (each contributing 6.2% of wages up to the taxable maximum of $160,200) and the self-employed (contributing 12.4% of their wages). However, this system can only continue to function when there are enough workers to pay current beneficiaries. 

Why Is Social Security Running Out of Money

As mentioned above, Social Security funds are supplied by workers who contribute payroll taxes each year. But with the U.S. population aging, people choosing to have fewer kids and more baby boomers retiring, fewer workers are left to fund the benefits of each retiree. Without reform, the money held by Social Security trust funds could run dry by 2033. 

Proposed Solutions to the Social Security Crisis

Undoubtedly, Social Security needs fixing. With the current pace that Social Security funds are depleting, millions of senior citizens and retirees could see their benefits slashed by around 25% within a decade. To prevent a Social Security trust fund depletion, the government has two options: increase payroll taxes or reduce benefits. Of course, this is easier said than done, but lawmakers in Washington are currently considering a few solutions to tackle the Social Security crisis. 

Benefit Reductions

If Congress decides to fix Social Security by reducing benefits, it may do so by:

  • Raising the full retirement age. According to the Social Security Administration, you can start receiving your Social Security benefits as early as age 62. However, you won’t be entitled to full benefits until you reach your full retirement age — which is currently set to 67 for workers born after 1959. By raising the full retirement age threshold to 70 and beyond, some in Congress hope to make more workers ineligible for full Social Security benefits for longer — slowing down the pace of the Social Security trust fund’s depletion.
  • Reducing Social Security benefits for high earners. Lawmakers may also adjust the way that Social Security benefits are calculated to reduce the amount higher earners would receive in their golden years. 
  • Lowering Social Security Cost-of-Living Adjustments (COLAs). Since 1975, Social Security’s benefit increases have been based on how fast the cost of living is rising. These adjustments to the Social Security benefit amounts are also known as cost-of-living adjustments or COLAs. However, many argue that the cost-of-living adjustments have been too generous and should be lowered to decrease costs and make benefits grow slower. 
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Tax Increases 

Here’s what Congress may do if it chooses to reform Social Security by raising taxes:

  • Lifting the tax cap. In 2023, any income over the earnings cap ($160,200) is exempt from the Social Security payroll tax. By eliminating or lifting this tax cap, Congress could provide more revenue to the Social Security trust fund and keep it solvent for longer. 
  • Increasing payroll taxes. Employees and employers currently each contribute 6.2% of wages in taxes to fund Social Security. By increasing this rate, Congress could pump more money into the Social Security trust fund and ensure it remains sustainable for years to come. 
  • Taxing fringe benefits. Fringe benefits are perks or extra compensation above an employee’s stated salary. And certain fringe benefits, such as health and life insurance, are nontaxable. If Congress taxed these dollars, they could improve the Social Security program’s solvency. 

Which Proposed Solution Would Actually Work?

So, what’s the verdict? Which of these proposed solutions to resolve the Social Security crisis would actually work? 

According to Nicholas B. Creel, a political scientist and business law assistant professor at Georgia College & State University, Republicans often lean heavily toward the cost-cutting approach of benefit reduction, whereas Democrats are more inclined to consider tax increases to reinforce revenue. Creel said that “in the end, we’ll probably have to rely on both strategies given that changes to the program will necessitate a bipartisan compromise to get it passed into law.” 

But in Creel’s opinion, eliminating or lifting the income cap on Social Security tax seems to be the most sensible option. Currently, the tax exempts all income over $160,200, which means that every dollar earned over that amount is not subjected to the tax. He said, “By lifting this cap, Social Security would be able to pay promised benefits for at least another 35 years.” Plus, this increase in taxes would only affect the wealthiest 6% of Americans who earn more than $160,200 and can well afford the increased taxes. Creel argues that this tradeoff is worth it in order to ensure that all Americans receive the benefit payments that were promised to them.

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What Can You Do To Ensure a Fully-Funded Retirement?

While you can’t fully control what Congress does in the next decade to fix Social Security, you do have control over your own finances. To ensure a fully-funded retirement, start cutting back on your spending and socking away extra cash. And if you need help creating a solid retirement plan, consider working with a financial advisor who can guide you in the right direction. By building a cushy nest egg, you won’t have to worry about not receiving enough Social Security benefits to sustain a comfortable lifestyle in your golden years. 

Vance Cariaga contributed to the reporting for this article.

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