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?
Categories: Social Security