If you’re concerned about the future of Social Security and potential Social Security reform, you’re in good company. Many Americans rely on Social Security retirement benefits. Decisions about when to claim or delay Social Security retirement benefits are moot because these individuals and families don’t have other income sources, investments, or assets upon which to rely.
Rather than consider options to maximize Social Security benefits, these individuals need to claim Social Security as soon as they’re eligible. Many in this financial condition express concerns about the Social Security system’s financial health because Social Security retirement provides their sole means of support.
Social Security Trust Fund Financial Status
According to the Social Security Trustees Report (2016), Social Security is facing short-term liquidity challenges. Current tax revenues and eventual liquidation of fixed income assets held in SSA’s trust fund will maintain Social Security payments for about 18 years (2034).
At that time, government paper held in the Social Security trust fund will be gone. There won’t be enough assets in the fund to create sufficient cash flow to pay beneficiaries in full.
The Future of Social Security Reform
However, it’s important to take a closer look at how Social Security collects revenues and pays benefits to retired workers. Current workers and employers’ payroll taxes go almost immediately to Social Security to pay current retirees’ benefits.
That’s why SSA estimates it could continue to pay about 79 percent of existing benefits claims in 2034 from payroll tax revenues and maintain a minimum of 71 percent of outstanding benefits until 2089. Social Security maintains an ongoing 75-year projection of incoming revenues and outstanding beneficiary claims:
SSA’s projections don’t include the end of Social Security as we know it. It won’t become insolvent or go broke by 2034.
By 2034, SSA projects that beneficiaries will need to accept lower benefits unless Social Security makes changes today.
Raising the Social Security tax rate or decreasing current benefits are frequently mentioned by politicians and media outlets as possible solutions to the projected shortfall.
SSA estimates that if benefits were cut now to maintain solvency over the next seven to eight decades, current benefit payouts would only drop about 16.4 percent.
SSA projects that beneficiaries’ retirement payments would be reduced by about 21 percent in 2034 if the agency can’t raise additional revenues over the next two decades.
By 2040 and later decades, Social Security would reduce beneficiaries’ payments by 29 percent or more.
According to current SSA projections, the worst future case will result in decreased monthly benefits to beneficiaries if Congress doesn’t make changes to support Social Security in the meantime.
Proposed Social Security Tax Increases
Raising Social Security taxes would shore up both Social Security retirement benefits and Social Security’s disability fund. Some proponents of the tax increase say that increasing FICA taxes by about 2.62 percent would alleviate Social Security’s projected shortfall.
Although 2.62 percent doesn’t seem like a lot on the face of things, it’s important to understand that FICA taxes would increase from a current 12.4 percent to 15.02 percent of payroll. Adding to the payroll tax burden would be likely to push ordinary income tax rates above today’s levels.
Raising ordinary income tax rates is a painful solution to Social Security’s woes. A combination of raising Full Retirement Age (FRA), increasing FICA tax, higher wage caps and/or bend points could help Social Security raise revenues. Other solutions to resolve Social Security’s projected deficits include:
Reduction of the annual cost-of-living adjustment (COLA) by one percent per year: If implemented, this step might eliminate up to 65 percent of the projected financial shortfall.
Reduce upper-limits bend points from 32 percent and 15 percent, to 21 percent and 10 percent (respectively) over the next three decades: If implemented, this step might eliminate up to 56 percent of the projected Social Security shortfall.
Raise FRA to age 67 by 2022 and to age 68 by 2028: If implemented, this step would reduce the projected Social Security shortfall by 16 percent.
Raise FRA to age 69 by 2034: If implemented, this step would reduce the projected Social Security shortfall by 38 percent.
Remove the Social Security cap on wages but allow a 15 percent bend for all income: If implemented, this step would reduce Social Security’s projected shortfall by 71 percent.
Increase current FICA payroll taxes +2.6 percent, increasing from 12.4 percent to 15+ percent: If implemented, this solution to eliminate Social Security’s projected fiscal shortfall.
Ultimately, it’s important to understand that Social Security isn’t in immediate financial danger.
It’s extremely important to understand that most current and soon-to-retire beneficiaries wouldn’t respond well to lower Social Security retirement checks. A responsible individual who delays claiming Social Security retirement benefits to age 70 doesn’t want to know his or her benefits will be reduced by 21 percent in 18 years.