S.O.S.S. - Save our Social Security

Social Security faces a major challenge.  Projections show a significant funding shortfall.  Right now, projections show a 24% shortfall in 2034.  This would mean a pay cut for millions of retirees.  This year is also an election year, and this will be a hot topic.  How will they fix it?  We share our thoughts, next. 

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Nothing New

The Social Security funding problem is not anything new.  For more than a decade, there have been warnings about the potential shortfalls.  For the past few years, the benefits paid have exceeded the revenues generated from taxes.  By 2034, projections show the "surplus" will be gone.  Once that happens, the benefits paid cannot be more than the amount of revenue collected.   This could mean millions of Americans face a pay cut. 

How did we get here?  More importantly, how can it be fixed?  

How did we get here?

Social Security vs. Pensions

Social Security benefits resemble a pension.  Pensions provide a monthly income to their beneficiaries.  Many people look at the income from a pension as guaranteed income.  And like Social Security, pension funds are required to estimate their future benefits.  This way they can try to maintain adequate funding. 

That's where the similarities end.  Pension funds are separate from the Company's assets.  The company cannot legally use the funds in the plan to pay for its expenses.  The pension fund's assets are also invested for future growth.   Social Security is none of those things.

Social Security is a government-sponsored program.  It has no reserve fund (remember the "lock box" from previous elections?).  The government can use the surplus on other expenses, and they have.  

The Last Major Update to Social Security.

The last major change to Social Security was in 1983.  Here are some of the significant changes:

• It gradually increased the full retirement age to 67.
• It made a portion of your Social Security benefits taxable.
• It included an automated cost of living adjustment. 
• It increased the tax rate for workers and employers to the current 6.2% rate it is today.

This legislation had overwhelming bi-partisan support and extended the life of the program.  But it only kicked the can down the road to where we are now.

How does it get fixed?

Increased revenue

For workers, Social Security is one of the taxes we pay.  The worker pays half, and their employer pays half.  How could the government increase the amount they collect?

• • • Remove the earnings cap - There is a limit to how much of a person's earnings get taxed for Social Security.  This year the earnings limit is $168,000.  Any amounts earned over that sum are not subject to Social Security taxes.  Projections show removing that cap would go a long way to extending the life of the program.  It is also a change many Americans would support (unless you make more than $168,000 of course).
    • Increase the tax rate - While not as palatable for most Americans, increasing the tax rate would also help.  Even a modest increase from 6.2% to 6.5% would make a significant impact to the program.

• Likelihood - High. It is hard to imagine a solution to this problem without an increase in taxes.  

2. Increasing the Full Retirement Age.

Full retirement age for workers born in 1960 or later is 67 years old.  This means if you retire before that age, your benefits are reduced.  A person retiring at 62 and starting benefits face a 30% discount.  

However, people are living longer, and that places stress on the current system.  Keep in mind, when Social Security started statistical life expectancy was 65. Today life expectancy is 82 for men and 85 for women.  Increasing full-retirement age potentially reduces the years a person depends on benefits.  It also increases the discounts for early retirement.  If full-retirement age is 69—under the current formula—a 62-year-old would see a 40% discount in their benefits.  

Likelihood - Moderate.  While it seems like an easy fix, It would also looked at as a benefit cut.  And most people don't want to work to age 69 or 70.

3. Benefit Cuts

The math behind Social Security benefits is complex.  They use terms like Average Indexed Monthly Earnings (AIME)and bend points.  The formula for your primary insurance amount is 85% of the first $1,147.  Then 32% of the amount between $1,147 and $7,078.  And if your AIME is over $7,078, they use 15% of that amount up to the maximum - $14,000.   Any amounts of AIME over $14,000 do not count towards the calculation.  The formula tilts the income replacement percentage in favor of those with lower earnings. 

Benefit cuts could come in different forms.  One of them would be not removing the maximum benefit cap.  Currently, there is a maximum benefit payment because not all of a person's earnings are taxed.  If they remove the income cap for taxation purposes and do not raise the maximum benefit, that is a benefit cut.

Means testing is another way.  This method would reduce your benefits based on other factors like income or assets.  This is a far more aggressive strategy.

Likelihood - Moderate to low.  Either method of reducing benefits would not likely get overwhelming bipartisan support. 

Swaying Public Opinion

As politicians hit the campaign trail later this year, there will be plenty of ideas shared with us.  Most of them will be an attempt to garner support for their ideas.  While one candidate has not laid out a clear plan for how he would fix this problem the other has.  

President Biden has suggested that he would increase the minimum benefit.  The way the cost-of-living adjustment gets calculated would be changed.  And he would also increase benefits for people over 80.  In isolation, all these could make the problem worse without a tax increase.  

Does it get fixed in the next 4 years?

This is the big question.  This has been a known problem for well over a decade.  Many in the Senate and House have offered plans to address the problem.  Unfortunately, none have made it to the floor for a vote.  Will it finally get fixed in the next four years?   That's a good question.