Politicians have avoided tackling Social Security’s significant financial issues for a reason. The proposed solutions, such as reducing benefits or increasing taxes, would provoke strong opposition from influential groups such as older citizens and the business sector. In 2022, approximately 66 million Americans depended on Social Security benefits, which serves as a crucial source of support for many. According to the Social Security Administration, 42% of elderly women and 37% of elderly men rely on the monthly payments for at least half of their income.
The circumstances are becoming increasingly dire as the most recent annual report from the trustees of the entitlement program indicates that the combined Social Security trust funds are expected to be exhausted by 2034. This means that the program’s income will only be sufficient to cover 80% of the benefits owed, with the reserves completely depleted.
The trustees’ projection for the depletion of the Social Security
In 2022, approximately 66 million Americans depended on Social Security benefits, which serves as a crucial source of support for many. According to the Social Security Administration, 42% of elderly women and 37% of elderly men rely on the monthly payments for at least half of their income. Although the Republicans’ push to reduce spending during debt ceiling negotiations has reignited discussions about the finances of the entitlement program, experts believe that little action will be taken since the date of insolvency is still too far in the future.
During the last major overhaul of Social Security in 1983, the program was on the brink of being unable to pay full benefits. At that time, Democratic lawmakers in the House collaborated with Senate Republicans and then-President Ronald Reagan from the GOP to enact reforms that included an increase in payroll taxes and a gradual rise in the full retirement age from 65 to 67, among other changes.
Ways to reduce expenses by reducing benefits
Over the years, numerous suggestions have been put forward to tackle the financial shortfall of Social Security, many of which entail multiple strategies. Several of these options concentrate on cutting costs for the entitlement program, although progressive supporters and senior citizen organizations are prompt to note that these actions constitute reductions in benefits, which they would firmly resist.
One popular suggestion is to increase the retirement age. At present, individuals can begin receiving Social Security benefits at the age of 62, although doing so would result in a reduction of their lifetime payments by as much as 30%. The full retirement age, which had remained at 65 for most of the program’s history, is gradually being raised to 67 for Americans born in 1960 or later.
Some policymakers propose increasing the full retirement age to 70 for prospective retirees, aligning it with the changes in life expectancy. As a result, those who retire earlier than that would receive smaller monthly payments than they would under existing laws.
This move could erase approximately one-third of the 75-year shortfall in the Social Security trust fund.
In 2022, the Republican Study Committee, a conservative group, proposed a budget plan that recommended raising the full retirement age for future retirees by three months per year until it reaches 70 for individuals born in 1978. It would also tie the retirement age to future increases in life expectancy and modify the number of working years used in benefit calculations from 35 to 40 years.
Another option involves reducing benefits for wealthier Americans, which was also part of the Republican Study Committee’s budget plan.
Ways to Increase Revenue for Social Security
Increasing the amount of payroll taxes collected is the primary method of generating additional revenue for the Social Security system. Left-leaning experts and Democrats are advocating for a proposal that would eliminate the wage cap, requiring high-income earners to contribute more in payroll taxes. Currently, both employers and employees pay a Social Security tax rate of 6.2%, totaling 12.4%. However, the tax is only applied to annual wages up to $160,200 in 2023. In contrast, Medicare’s total payroll tax rate of 2.9% is applied to all wages, and higher-income Americans pay an additional 0.9% Medicare tax.
According to the Congressional Budget Office, in 1937, when Social Security first began collecting payroll taxes, approximately 92% of earnings from covered jobs were subject to the tax. However, due to rising income inequality, that figure had fallen to about 83% by 2020.
To address this issue, some Democrats in Congress have proposed increasing the amount of wages subject to the payroll tax. Representative John Larson of Connecticut has suggested applying the tax to wages over $400,000, which he believes would extend the program’s solvency by nine years.
Earlier this year, an independent, Vermont Sen. Bernie Sanders, and a Democrat from Massachusetts, Sen. Elizabeth Warren, introduced a bill proposing several Social Security changes. These included subjecting all income over $250,000 to the payroll tax and extending the tax to investment and business income. The senators claim these changes would ensure the solvency of the program for 75 years.
However, raising the wage cap could change the fundamental structure of Social Security, where retirees’ benefits are tied to the taxes they paid during their working years. For instance, the proposal put forth by Sanders and Warren would not credit the additional taxed earnings towards benefits. This would increase the positive impact on the solvency of the program but might face opposition from some advocates who believe that the connection between taxes and benefits should be maintained.