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Securing Social Security
Social Security at
Source: 2020 Medicare Trustees Report
Social Security—which provides benefits to about 64 million retirees, survivors of deceased workers, disabled workers, and dependents—is the nation’s largest social insurance program. Social Security currently receives more in payroll taxes and interest income than it pays out in benefits, but that will shift as more Americans retire and continue to live longer. The latest Social Security Trustees Report estimates that the surplus assets generated over the past 30 years will be depleted by 2035, at which point only 79 percent of the promised benefits can be paid without a change in the promised benefits or additional financing. It is important to note that the projections in the latest report do not incorporate the unknown effects of the COVID-19 pandemic.
The program’s long-term solvency challenge stems from a declining ratio of workers per Social Security beneficiary. Social Security benefits primarily are funded through payroll taxes of 12.4 percent, split evenly between workers and employers. Americans are having fewer children and living longer than in the past, and those trends in addition to Baby Boomers retiring in large numbers over the next 20 years. In short, the U.S. population is changing.
Social Security is supported by two trust funds—the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) funds. The DI trust fund is not projected to be exhausted until 2065, according to the latest trustees report, 13 years later than the projection from last year’s report. The OASI trust fund that pays benefits to retirees and their dependents will run out of surplus assets in 2034, which is the same as last year’s projection. The combined OASDI trust fund totaled $2.9 trillion at the end of 2019 but now faces large annual withdrawals until depleted in 2035.
Options to provide adequate long-term financing for Social Security involve revenue increases, benefit reductions, or some combination of both. Here are several potential approaches.
Raising payroll taxes or increasing/ eliminating its cap
Today, workers and employers each contribute payroll taxes of 6.2 percent that fund Social Security. Some have called for raising that rate to 7.5 percent or some other level. Additionally, the payroll tax is capped at a maximum annual income amount—$137,700 in 2020, up $4,100 from 2019—and some have proposed lifting the maximum cap to $250,000 annually, other levels, or eliminating it entirely to raise additional revenues for Social Security.
Increasing Social Security income taxes
Social Security benefits are partially taxed on a sliding scale for singles with annual incomes currently above $25,000 annually and married couples above $32,000. The taxable percentage on Social Security benefits is capped at 85 percent for the top-earning retirees.
The cost-of-living adjustment (COLA) for Social Security beneficiaries is based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Switching to a different inflation benchmark could slow annual COLA increases to beneficiaries. Beneficiaries would receive slightly smaller benefit increases in their early retirement years but those reduced COLAs amount to net reductions as they are compounded over time.
Reducing benefits to wealthier retirees
Some have proposed reducing or eliminating altogether Social Security benefits for higher-income beneficiaries. Supporters of such proposals say that this program should not be used to benefit those who are not in financial need, because Social Security faces long-term financial challenges. Opponents argue that eliminating benefits for wealthier individuals would be unfair because higher-income workers had contributed and been promised retirement benefits like everyone else.
Raising the full retirement age further
When Social Security began paying benefits in 1940, workers could receive full retirement benefits at age 65. The law was changed to raise gradually the full retirement age to 67 to address solvency concerns in 1983 and in recognition of the increase in Americans’ lifespans. The American Academy of Actuaries supports raising the full retirement age further as one part of a solution to restore Social Security’s long-term financial health. Additionally, the early-retirement age of 62 could be increased.
While Social Security is not in imminent financial danger, the program does face long-term financial viability challenges unless changes are made. Smaller or gradual adjustments adopted sooner could help avoid the need for options that could have greater impact on taxpayers or beneficiaries required later to maintain the program’s fiscal integrity. The Academy believes that the time has come for the United States to address Social Security’s long-term financial soundness.
Additional Resources from the American Academy of Actuaries
- Making Issues Count: Social Security (2020)
- Social Security—Automatic Adjustments (2018)
- An Actuarial Perspective on the 2019 Social Security Trustees Report (2019)
- Social Security Reform Options issue brief (March 2014)
- Raising the Retirement Age for Social Security issue brief (October 2010)
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