For years, Social Security has been the Third Rail of politics -- the thing you couldn't touch without getting zapped. After all, what politician in his/her right mind would want to mess with the backbone of the nation's retirement system, not to mention upset the almost 40 million people collecting retirement benefits?In the past, almost nobody, but these days, it seems everybody is messing.
The concern is that the system, which provides an average monthly benefit of $1,335, will run out of money -- not necessarily for the current crop of retirees or about-to-be retirees, but their children and grandchildren could see the bottom of the piggy bank unless something is done. The program is expected to be able to pay full benefits until 2033 and then just 75 percent of benefits after that -- assuming nothing changes. Without arguing the merits of whether Social Security even truly needs saving -- yes, there are those who say it doesn't -- here are a dozen different ideas politicians have been kicking around (with a special H/T to AARP):
1. Push back the retirement age.
Raising the retirement age means people wouldn't be eligible to collect Social Security benefits until they are older. The age used to be 65, is now 66 and will creep up to 67 under current law. Under one plan, starting in 2023, the retirement age would increase by two months a year until it reached 68 in 2028. Estimates say this would fill 16 percent of the funding gap.
Given that so many people are living longer and wouldn't mind staying in the workforce for a couple more years, on the surface this idea is a slam-dunk winner.
There's just one problem: Talk to anyone 65 or older about how their job search is going and you're likely to hear plenty about age discrimination in hiring. You can tell older workers they can't retire quite so fast, but don't you also need to tell companies -- including all of Silicon Valley -- that they need to stop discriminating against people because of their age?
2. Indexing benefits.
I have to admit, this one's a head-scratcher.
If, as projected, Americans continue to live longer from one generation to the next, it makes sense that individual people will receive Social Security benefits for a longer time. The longevity trend fuels Social Security’s funding gap, and one option to offset it is called longevity indexing. What it means is Social Security would pay you less as life spans increase.
Just one problem: Not everybody's life span is increasing or increasing equally.
Low-earning workers have seen little or no gains in longevity. Cutting benefits for everyone just because well-off Americans are living longer harms the most vulnerable.
3. Playing funny with the numbers.
Social Security benefits attempt to keep pace with inflation through annual cost of living adjustments, or COLAs. In low-inflation years like this one, no COLA is paid. The COLA is based on the consumer price index -- an index that measures how much household goods costs.
Some politicians think that using another index would make better sense because the spending patterns of older Americans are different -- generally there's more spent on health care costs, for one. There is something called the elderly index which, if used, the COLA would likely be on average 0.2 percentage points higher. That would be nice, but maybe counter-intuitive to the idea of reducing Social Security's shortfall.
4. Cut the benefits given to higher earners.
Think Robin Hood here, you know, taking from the rich and giving to the poor.
People who are higher lifetime earners receive bigger Social Security payments than those who are lower lifetime earners. But the political logic here is that those payments to higher lifetime earners matter less because they replace a smaller percentage of what their paychecks were. One proposal is to reduce benefits for the highest-earning 25 percent; another reduces them for the top 50 percent. Most options use a sliding scale.
The very real fear, of course, is that these proposals would actually cut benefits for middle-class workers who make as little as $40,000 a year, notes an AARP report. These people are hardly “high earners,” but they could fall into the top 50 percent of all earners. Benefits are already modest and retiree health care costs strike rich and poor equally.
5. Raise the cap on payroll taxes.
Social Security is funded from a payroll tax. Presently, you pay this tax on annual earnings up to $118,500. Any wages earned above $118,500 go untaxed, at least for Social Security. This cap generally increases every year as the national average wage increases. Today, the cap covers about 83 percent of total earnings in the nation. Raising the cap to cover a higher percentage is another idea being kicked around. The question is how high can you go? One commonly mentioned goal would raise the cap to cover 90 percent of earnings, which in 2016 would put the cap at about $274,200. Before you faint, just know that only 6 percent of workers earn more than the current cap of $118,500. Some critics fear that the tax increase would discourage people from working more and therefore hurt the economy. They say also that reducing the amount of take-home pay means people having less to spend -- which also hurts the economy.
6. Eliminate the cap on payroll tax altogether.
Go big or go home!
As just noted, the Social Security payroll tax currently applies to yearly earnings up to $118,500. Instead of just raising the cap to above that amount, how about eliminating the cap entirely? If all earnings were immediately subject to the Social Security tax, the new revenue would fill an estimated 71 percent of the funding gap, said the AARP report. Think about it: This change alone would eliminate most of Social Security’s long-term financing gap. And if it doesn't sink the economy, as the naysayers say it might, eliminating the tax cap immediately could actually cause Social Security surpluses. Imagine that for a change.
7. Increase the payroll tax rate.
Employees and employers each currently pay a 6.2 percent tax to Social Security on earnings up to $118,500. Self-employed workers pay both the employer and employee shares for a total of 12.4 percent. By raising the tax rate, Social Security would have more money. For instance, on a $50,000 annual salary, increasing the payroll tax to 7.2 percent (14.4 percent) would increase the annual employee and employer contributions by $500 each. Even increasing the payroll tax rate from 6.2 percent to 6.5 percent from 2018 to 2023 would fill an estimated 20 percent of the funding gap. Increasing the payroll tax rate gradually over 20 years on employers and employees from 6.2 percent to 7.2 percent would fill an estimated 53 percent of the funding gap.
Most Americans say they would rather pay more than see Social Security cut. This change -- just 50 cents more a week for an average earner -- would close just over half of the financing gap. Those opposed to the idea worry about what higher labor costs will do to employers. Would it discourage hiring and push companies toward more automation?
8. Impose the payroll tax on everything.
Currently, employees pay Social Security and Medicare payroll taxes on their contributions to tax-preferred employer-sponsored retirement accounts, things like 401(k) plans. But they don't on their contributions to other benefit plans, like flexible spending accounts. Collecting payroll taxes on everything would increase the Social Security program’s funds, as well as increase the earnings used to calculate the Social Security benefits of workers who have those benefit plans. If you contributed $2,000 to a flexible spending account, you and your employer would pay the 6.2 percent payroll tax (or $124 each) on that money. Taxing these salary reduction plans for Social Security the same way we tax contributions to 401(k) plans would close an estimated 10 percent of the funding gap.
The objection to doing this is simple: Health care is already expensive enough. Changing the tax treatment here would mean fewer employers offering these types of benefits to workers, and higher total tax bills.
9. Change who actually gets benefits.
Social Security doesn't only provide retirement benefits to workers. It pays retirement benefits to their current spouses, their ex-spouses, their dependent children and more. It also pays benefits to the dependents of workers who have died; and to workers who have become disabled and their families. Since Social Security is set to be overhauled, the question of who gets what is a wide open door. Some politicians would like to see increased benefits for surviving spouses, a higher minimum benefit to keep low-paid workers with long-time jobs above the poverty level, and earnings credits for those who had to drop out of the paid workforce to care for a child or aging parent. Don't expect any of these reforms to wind up saving money.
10. Include state and local government workers.
About 25 percent of state and government employees are not covered by Social Security. Instead they have retirement plans provided by state or local governments that don't participate in the Social Security program. One proposed change is to make all newly hired state and local government workers participate. Once those workers start kicking into the fund, about 6 percent of Social Security’s funding gap will be closed, reports the Congressional Budget Office.
Making newly hired workers join Social Security would increase revenue now, but eventually the program would have to pay these workers benefits. Some say that would just push the problem down the road to be dealt with in the future.
11. Increase how many years of earnings are considered when benefits are calculated.
The amount of benefits are computed from a worker’s highest 35 years of annual indexed earnings that were subject to Social Security payroll taxes. If a worker has fewer than 35 years of earnings, each year needed to reach 35 is assigned zero earnings. One option to help close the Social Security funding gap would increase the number of years of earnings used to calculate Social Security benefits from 35 to 38 or even 40. That would likely add a bunch of zero earning years. Increasing the number of computation years to 38 is estimated to fill 11 percent of the solvency gap.
Adding more years would certainly encourage people to stay in the workforce longer. It also hurts the ones who need it the most: women and lower-income, less-educated and minority retirees. It would reduce benefits not only for retired workers, but also for their dependents and survivors, says AARP.
Rich or poor, Social Security benefits have always been provided to anyone who has paid into the system and who meets the work and age requirements. That’s regardless of other income -- investment, pension, savings. One option to help close Social Security’s funding gap is to “means test,” which would reduce benefits for higher-income recipients and could even eliminate benefits altogether for the highest-income households. Unlike the option to reduce benefits for higher earners, which uses a measure of career average earnings to reduce benefits, means testing would reduce benefits based on current income.
Means testing would change the very spirit and core of Social Security, taking it from being an earned right to a welfare system that penalizes you for saving or earning a pension. Not to mention that means testing would be a huge breach of faith for working Americans who earned their benefits by paying in over the years.
What do you think? Do any of these ideas appeal to you?
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