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How to Fix an Ailing Social Security Program

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If Social Security Is To Be Saved, Action Must Be Taken
If Social Security Is To Be Saved, Action Must Be Taken

When President Franklin D. Roosevelt created the Social Security program with the 1935 Social Security Act he revolutionized the way Americans would live for decades to come. While social security has served the American populace well, the system can no longer sustain itself long enough to provide the same benefits for the future generations of retirees without a major overhaul.

The miracles of modern medicine have created a disproportionate number of old folks using benefits relative to the healthy, working, taxpaying youngsters contributing to the program. Current projections put complete bankruptcy of the program around 15-20 years from today. After that point, the money currently held in reserve will be completely depleted and tax revenue will only cover 77 percent of scheduled benefits. It’s clear that the system is unsustainable, but how can it be fixed?

Increasing Social Security Taxes

If the program isn’t collecting enough money, the obvious solution would seem to be to raise the Social Security tax, which currently sits at 6.2 percent of workers’ income, plus a matched employer contribution. Even a relatively small increase, say of just one percentage point, to 7.2 percent over a 20-year period, would improve the situation significantly, reducing the current funding shortfall by some 52 percent. What this increase would mean for the average worker earning a $50,000 salary is a tax increase of  an additional 50 cents per week each year of the phasing-in period. More abrupt increases to the Social Security tax, up to 7.2 percent in 2022 and 8.2 in 2052, would lower the funding gap a full 76 percent, but that would equate to a $9.60 tax increase per week for the average worker.  Therefore, increasing taxes alone, would only delay the problem.

Remove the Tax Cap

Currently, annual earnings beyond $117,000 aren’t subject to the Social Security payroll taxes or factored into retirement benefits. That means that income subject to the Social Security tax is effectively capped. Removing the tax cap is one of the proposed solutions that is widely supported, with 80 percent of Americans polled responding favorably, including 76 percent of people with family incomes greater than $100,000. The elimination of the tax cap over a period of 10 years would mean the top 6 percent of earners would pay Social Security taxes on all of their earnings, consequently receiving higher benefits upon retirement. A whopping 74 percent of the Social Security shortfall could be eliminated this way.

Change the Retirement Age

Raising the retirement age is one of the less effective, less popular proposals on the table. Currently, the age for full retirement is 66 for most Baby Boomers and 67 for those born after 1960. Gradually increasing the retirement age to 68 or 70 over a number of years would only reduce funding shortfalls by between 7 percent and 25 percent, depending on how quickly the change was implemented. Regardless of political affiliation and income level, however, this idea is unpopular for obvious reasons—a full three-quarters of the adult population object to raising the full retirement age to 70.

Cut Benefits and Means Test

Cutting benefits is often suggested by individuals who see the program essentially as an anti-poverty measure, without taking into account the programs that provide much-needed benefits to the unemployed, those who are injured on the job or who have disabilities, as well as women, infants and children. Proponents of this option suggest a reduction or even elimination of Social Security benefits for high earners, starting with a reduction for individuals and couples with incomes greater than $55,000 and $110,000, respectively, and a complete elimination of benefits at the $110,000 level for individuals and $165,000 for couples. This “means test” would reduce the shortfall by a scant 20 percent. Opponents of this plan point to the origins of Social Security, intended to as a universal program to support all workers, regardless of income. It wasn’t designed to be welfare—it was designed to help hardworking Americans live a decent life after their retirement from a life of service.

There is no clear-cut single answer to the question of how to fix Social Security. Experts and politicians continue to argue that cutting benefits and raising the retirement age are viable solutions with equal vehemence as their opponents, who argue that expanding Social Security is what’s needed, or even an elimination of the payroll tax. What’s clear is that the system as it stands now is in jeopard. If we want to revive it we need to act quickly with a combination of the above (or not yet proposed) solutions.