After working for the Social Security Administration for thirty-five years and as a financial planner for eleven years, I am frequently asked the question, “Will Social Security be there for me?” One reason people are so worried about the future payment of Social Security benefits is the media. You can’t read a newspaper or turn on the television without hearing that Social Security is going bankrupt. As a result, there is diminishing confidence in the future payment of benefits. This lack of confidence has persisted over many years. As far back as 1994 a poll was conducted showing that more young people believed in UFOs (unidentified flying objects) than the likelihood of their receiving a Social Security check. This skepticism has more or less persisted ever since.
I believe there are good reasons to rely upon future payment of Social Security benefits. The first reason is political. Social Security is the most popular entitlement program in America[i]. Because of its popularity, it is often spoken as the third rail of politics. Legislators who propose addressing the solvency of the program may suffer severe political consequences. To some extent, Social Security’s popularity is why it remains essentially unchanged over the last forty years. Social Security benefits are extremely important for the well-being of seniors and disabled workers. About 40% of beneficiaries over age 65 receive most of their income (50% or more) from Social Security. For 12% of men and 14% of women on Social Security, benefits represent 90% or more of their income[ii]. Imagine the extensive poverty and political unrest that would occur if benefits were no longer payable.
Since 1983, the revenue from payroll taxes, taxation of Social Security benefits, and interest income has been sufficient to cover the cost of Social Security benefits. There is even a surplus. According to the Social Security trustee’s report, the assets in the trust fund will not be exhausted until 2035. So, what happens in 2035? Without further action, it is projected that 83% of benefits are still payable using revenue from payroll taxes and taxation of benefits. Even after 75 additional years, which is as long as the Trustees carry out their projections, there may still be enough money to pay 73% of Social Security benefits[iii]. Even in 2035 and beyond, then, benefits are still payable. They are just not payable at current levels unless further action is taken.
It is quite possible to address the solvency of Social Security without overhauling the program. Numerous proposals have been advanced to shore up the program so that benefits may still be payable at current levels. On the SSA website, there are more than one hundred such proposals. One idea is to increase the payroll tax rate. Tax rates are currently capped at 12.4% of income shared equally between the employer and employee. Some people believe these rates should be increased. One such proposal calls for increasing the tax rate by 1/10 of 1% each year from 2030 to 2049 until the tax rate reaches 14.4% in 2049 and later. This provision would eliminate 43% of the shortfall[iv].
Others believe that the current rates should not be raised, but the wage base should be raised. The current wage base is capped at $184,500 (2026). Raising the wage base so that it would eventually capture 90% of national wages by phasing it in from 2025-2034 would eliminate almost 24% of the shortfall[v].
This proposal has historical precedent. The 1983 Social Security reforms set the cap at a level so that 90% of all earnings would be subject to payroll taxes. Over time, rising inequality has caused this figure to drift lower, so that by 2020 and 2021, Social Security FICA taxes captured only 81.4% of all earnings[vi]. By raising this percentage to 90%, we would be reinstating the intent of the 1983 amendments.
Social Security benefits are inflation protected based upon the consumer price index (CPI). If the cost-of-living increases, benefits increase commensurately. One proposal that has gotten attention in recent years is to change the way the consumer price index is calculated. Some economists believe that a chained CPI is a truer measure of inflation. A chained CPI measures the adjustment that normally occurs when consumers substitute less expensive items for more expensive ones. For example, if the price of beef goes up faster than the price of chicken, consumers will buy more chicken and less beef. If this proposal were adopted, it is projected to reduce the annual Social Security cost-of-living adjustment by about .3%. This would eliminate approximately 18% of the shortfall[vii].
Another popular proposal is to increase the normal retirement age (NRA). Normal retirement age currently stands at age 67 for anyone born in 1960 or later. If a worker retires before age 67, she receives a reduced Social Security benefit. Given that life expectancy continues to increase, many experts are suggesting that normal retirement age should be increased even further. One such proposal advocates adding two months each year to normal retirement age until it reaches age 69 and then adding one month every two years thereafter. This provision would eliminate 38% of the shortfall[viii].
These are only a few of the proposals to put Social Security on the road to solvency. There are many others. Implementing one or more of the proposed fixes may allow for continued payment of benefits at current levels in 2035 and beyond.
To conclude, there are a number of possible fixes that do not require scrapping or even overhauling the Social Security program. Furthermore, many of the proposals are phased in over an extended period so that workers may plan for them. To be sure, where Congress is concerned, there are no guarantees. And absent making up the shortfalls with general revenue, some things will need to change at some point. But fixing the program is not as hopeless as some make it sound.
If you’re considering claiming Social Security and have questions about your claiming strategy, please contact us. We’re here to help.
Douglas Lemons
[i]https://today.yougov.com/politics/articles/45187-americans-evaluate-social-security-medicare-poll
[ii]https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf
[iii]https://www.ssa.gov/policy/trust-funds-summary.html
[iv]https://www.ssa.gov/OACT/solvency/provisions/charts/chart_run122.html
[v]https://www.ssa.gov/OACT/solvency/provisions/charts/chart_run266.html
[vi]https://www.epi.org/blog/a-record-share-of-earnings-was-not-subject-to-social-security-taxes-in-2021-inequalitys-undermining-of-social-security-has-accelerated/
[vii]https://www.ssa.gov/OACT/solvency/provisions/charts/chart_run096.html
[viii]https://www.ssa.gov/OACT/solvency/provisions/charts/chart_run117.html