Before the Coronavirus decimated much of the U.S. economy, Social Security was expected to go broke around 2035. At that time, it was expected that Social Security would only be able to pay out 76% of promised benefits. Millions of Americans rely heavily on Social Security to survive in retirement. Personally, I think this cut to Social Security benefits would be politically untenable.
Way back in 2010, the Social Security Board of Trustees gave two suggestions to help ensure Social Security would be able to pay scheduled benefits for the next 75 years. The first was an immediate reduction in Social Security benefits by 13%. The other suggestion was an immediate increase in the combined payroll tax rate from the current 12.4% to 14.4%. You would have been able to choose the first or second option, or some combination thereof, to ensure that Social Security lasts beyond the life expectancy of pretty much anyone reading this post. Sadly, nearly a decade later, in 2020, nothing has been changed to help ensure the survival of Social Security.
Please vote in November. The 2020 presidential election will likely have a significant impact on the future of Social Security benefits. Trump has made many policy suggestions that would be devastating for the long-term financial health of Social Security. For example, cutting payroll taxes. We are already in the middle of a recession, which will reduce payroll taxes, which in turn puts pressure on the Social Security Trust Fund. On the flip, Biden has called for expansion of benefits, which sounds great in the short term, but it will also ensure the need for additional ways to pay for more substantial benefits in the future.
Update: President Trump has signed an executive order suspending the collection of payroll taxes which fund Social Security and Medicare. He has also alluded to a desire to make this suspension permanent. This action alone has been called an act of war on Social Security and Medicare. Additionally, it is exactly the opposite of what we are outlining here to help save Social Security and Medicare.
Here are the four most promising ways to help save Social Security Now.
1) Increase Payroll Taxes
When you look at your paycheck and see a deduction for OASDI (Social Security’s Old-Age, Survivors, and Disability Insurance), this is your contribution to Social Security. Your employer also makes a similar contribution on your behalf. Those who are self-employed pay both parts of the contribution. In 2020, you will owe OASDI payroll taxes on your first $137,700 of income. You will owe 6.2% of your salary in Social Security payroll taxes, as will your employer. If you are self-employed, you get the joy of paying 12.4%, per year, but you also have more tax-planning options to keep more of your hard-earned money.
This way to save Social Security is pretty straight forward; more payroll taxes coming in will mean more money to fund Social Security benefits over time. Hopefully, the wave of unemployed Americans, due to the lack of action from the Trump administration around the Coronavirus, won’t be a permanent killer of jobs.
2) Increase the Full Retirement Age
The full retirement age for those born after 1960 is 67. The earliest you can claim Social Security is at age 62 for those who retire early. Pushing back the Social Security full retirement age could help shore up Social Security by decreasing the number of years that the benefits have to pay out to each individual. This will reduce the benefits further for those who claim Social Security early. Currently, someone with a full retirement age of 67 would see a 30% reduction of benefits when claiming early, at age 62. For example, $2,000 of monthly Social Security benefits at age 67 would be reduced to just $1,400, per month, at age 62.
3) Increase Income Level Subject to Social Security Taxes
Just the first $137,700 of earned income is subject to Social Security taxation. Increasing the amount of income subject to Social Security taxes could help extend the solvency of SS. This would mostly hit higher earner across the United States.
4) Decrease Taxes on Social Security Income
Reducing the taxation of Social Security may not seem like a great way to help save Social Security, but it may be. Ultimately, we all live off our after-tax income, also known as take-home pay. If retirees owe fewer taxes on their Social Security benefits, they may be able to shoulder a small reduction in gross benefits. If this was laid out properly, it could be a way to essentially means test Social Security benefits. If you decrease the taxes paid by lower-income retirees, you may be able to shrink their benefit without reducing their home from Social Security. On the flip side, you would likely be increasing taxes on those with more substantial retirement income streams, essentially taxing wealthier retirees who have less of their retirement income coming via Social Security.
How to save Social Security is a problem we have been facing for decades. Will anyone in Washington D.C. take this issue seriously before we are at a crisis point? Who knows? Just like putting off saving for retirement makes funding a secure retirement more challenging, the longer we kick the proverbial can down the road, the more drastic measures will be needed to save Social Security benefits. If and when there is eventually a strategy to help save Social Security, we will likely see some combination of the most promising aforementioned solutions.
For whom you vote for President and Congress this November will play a role in how any plans to help save Social Security and Medicare are enacted. The wrong vote could leave you without adequate medical care as you age, as well as this modest retirement income stream that millions upon millions of Americans rely on to survive.