Social Security

Why people are confused about “fixing” Social Security

Consider these two statements from the Motley Fool:

Social Security has more than $2.8 trillion in reserves, which are expected to run out in 2034

Don’t let anyone tell you Social Security is broke. The Social Security trust fund contained nearly $3 trillion in reserves as of the end of 2015. Plus, between Social Security payroll taxes and the trust fund’s interest income, the program is expected to run at a surplus every year through 2019.

After 2019, however, deficits are expected to begin, and they will continue until the trust fund is completely exhausted in 2034. Beyond that point, the incoming payroll taxes will only be enough to cover about three-fourths of promised benefits. Just to be clear, as a worst-case scenario, Social Security benefits will need to be cut by about 25%,18 years from now. However, as we saw earlier, that’s a cut that millions of retirees can’t afford.

The above statement is factual correct, but for many Americans is very misleading mainly because people read and hear only what they want to hear. Too many people stop reading after “Don’t let anyone tell you Social Security is broke.” 

There is indeed $2.8 trillion in the Social Security Trust (in the form of Treasury Bonds). But there is also many more trillions in liabilities for Social Security. If you have enough money in the bank to pay your 30- year mortgage for the next 18 years and no longer, should you do something now to be sure you don’t lose your home?

About that “run a surplus.” Keep in mind that is only true when you consider the interest earned on the Treasury Bonds held by the Trust, the money many people believe various presidents and Congress “stole” from Social Security. 

By gradually increasing the payroll tax to 7.2% and eliminating the wage cap, Social Security would be financially stable for the foreseeable future

There are several different ways we could fix Social Security, and most proposals fall into one of two categories — benefit cuts or tax increases. Across-the-board benefit cuts are so unpopular, it’s safe to say they won’t gain any political traction. And milder forms of benefit cuts are pretty unpopular, too. Just 35% of Americans favor increasing the retirement age by one year, and only 24% support reducing the way cost-of-living adjustments are calculated.

On the other hand, tax increases are not only widely supported, but they would also have more of an impact on the funding shortfall. Eighty-three percent of Americans are in favor of gradually increasing the payroll tax from its current 6.2% to to 7.2%, and such an increase would take care of 52% of the funding gap. Another popular change would be to gradually eliminate the earnings cap over a 10-year period, since only the first $118,500 in wage income is taxable for Social Security purposes. This move is supported by 80% of Americans and would close 74% of the funding gap all by itself. In other words, these two highly popular changes could fix Social Security without any benefit cuts or other modifications.

There are two considerations in fixing Social Security. The first is making it solvent for the next 75-years. The second is making the program sustainable, meaning it will be permanently fixed to go on and on beyond 75-years. This is done by again generating income in excess of expenses and building up the Trust. The above changes in taxation make the program solvent but do not make it sustainable. 

Of course, the above changes also place the full burden for solvency for both current and future retirees on the American middle class. So while over 80% of Americans support higher taxes to fix Social Security, I wonder if they understand the full burden?  

Also, raising the taxable wage cap under the above scenario assumes that the benefit for these higher income individuals will also increase.  That being the case, how can such a move help the Trust remain solvent?  The reason is that the Social Security benefit calculation formula creates a larger benefit as a percent of earnings for lower income earners. 

There are people who tell you these changes also leave money to expand benefits. Be careful about that promise. It creates ever growing liabilities and it cuts the period of solvency and enhances the problem of sustainability. 

We look at Social Security in a unique way because so many current retirees rely on the program for half or more of their income. We are looking backwards. Why don’t we focus more on assuring that is not the case for the working generation? Knowing the facts, why aren’t Americans taking action on their own to avoid such Social Security dependency? 

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3 replies »

  1. I think the top income for the FICA tax should be lifted and everyone pay every week. The majority of incomes never reach the top limit. Adding on one more year for Full retirement is not bad. More folks are still working past the Full age or they go back to work to make ends meet since SS only covers a little part of the expenses. 1/4-1/3 if you have higher earnings; it could be 1/2 but then you are taxed on quite a bit also. Maybe the taxes you do pay on it should go back into the fund.
    The Government HAS used some of our funds. We found that out this year when they tried to use it again. They say it isn’t ours now. They say it is not guaranteed anymore. Lance actually stopped them this year from taking out more. There are some honest folks in Congress who have admitted some facts about SS. The FICA tax is already there, so lifting the limit is fine.
    There are those who’s income is such that they are done paying by February but they are still entitled to collect when they come of age. And their SS checks are based ON INCOME AND YEARS WORKED. So their checks will be higher. It’s fair for them to help pay the higher tax.

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    • I think you misunderstand how SS works. All the income taxes paid on SS benefits go to the Trust (or Medicare for those who pay taxes on 85% of the SS benefit)

      Congress has not taken any of the money and used it. All the Trust money is in the form of US Treasury Bonds which pay interest to the Trust.

      The benefit calculation favors lower income people who receive a higher percentage of benefit on their earnings than do higher incomes. A benefit for someone earning $118,000 is less proportionally than someone earning $40,000 and the higher income paid significantly more in taxes.

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  2. I was surprised, but shouldn’t have been, that a poll suggests that 80% of Americans support increased social security taxes. The millennial generation and those thereafter will bear the largest burden, and based on the support that age cohort provided to Bernie Sanders, it appears as though they are willing to tax themselves, along with everyone else.

    Regarding lifting the income cap on wages subject to the payroll tax, that likewise appears to garner support. I suspect though that increasing the benefit to higher wage earners will be subjected to “means testing” .

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