Social Security – The Fix Is Simple, But It Ain’t Easy
The solution to fixing Social Security’s long term funding issue is really very simple, but just because it’s simple doesn’t mean it’s easy. Every year the Social Security Board of Trustees releases a report, which includes updated projections on the long-term financial condition of our Social Security system. One of its main focuses is on the ability of Social Security to meet all of its financial obligations over the next 75 years. The Board of Trustees released their latest report in June of 2016 with all it’s latest projections including the simple things that can be done to fix the Social Security funding shortfall. Most people in this country believe that Social Security is in a great deal of trouble, even on the brink of bankruptcy. They worry about it’s ability to make benefit payments for as long as they live in retirement. Younger people, who are decades away from retirement, worry whether Social Security will even exist when it is time for them to retire. Reading the latest Trustees Report should put most of those worries to rest. Social Security is going to be around in one form or another for a long time, probably well into the next century. The worst thing that could happen would be a cut in benefits for everybody, but that won’t happen for another 18 years or in the year 2034. If nothing is done to fix the system, then in the year 2034 everybody’s benefits would have to be cut by about 25%. In other words, you would receive 75% of what you should have been paid. Once these benefit cuts are made, Social Security can make all benefit payments going forward until the year 2090. So the worst thing that could happen is a 25% cut in benefits 18 years from now. Nobody wants to have their benefits cut. The Trustees Report highlights a number of options that could fix the funding shortfall with no benefit cuts for the next 75 years. The total deficit or funding shortfall is 2.66 % of taxable payroll. The simplest way to erase that deficit is to increase the payroll tax or FICA tax by a total of 2.66%. That tax increase could be split evenly between employers (1.33%) and employees (1.33%). The current FICA tax for employees stands at 6.2% of earnings, employers also pay the same rate of 6.2%. Increasing the FICA tax for both employers and employees by 1.33%, would bring it up to 7.53% and completely eliminate the need for any benefit cuts through the year 2090. In the current political environment, increasing taxes by this amount does not appear to be a viable option. The other option that would have the biggest impact on reducing the Social Security funding shortfall involves the earnings cap. In 2016, the earnings cap stood at $118,500. If you earned less than that amount then you paid FICA taxes of 6.2% on all of your earnings. If you were fortunate enough to have earnings that exceeded $118,500, any earnings in excess of that amount were not subject to any FICA taxes. Approximately 6% of all wage earners in this country have earnings that exceed $118,500. Simply eliminating the earnings cap, so that everybody pays FICA taxes on all of their earned wages, would resolve between 70% – 90% of the funding issue with no benefit cuts. Completely eliminating the earnings cap does not appear to be a viable political option either. But a combination of the two, raise FICA taxes a little bit and raise the earnings cap without completely eliminating it, could be more palatable politically and could accomplish the goal of eliminating the funding deficit with no benefit cuts for the next 75 years. Here is how it could work. Increasing the FICA tax by .8% for both employers and employees, from 6.2% up to 7.0%, would resolve about 60% of the long term funding issue. It is less than a 1.0% tax increase and hopefully more acceptable to politicians and their constituents. Just doing this by itself would extend the time before benefits would have to be cut until the year 2052 instead of 2034 or by an additional 18 years. In additional to the small FICA tax increase, if the earnings cap is increased from it’s current level of $118,500 in 2016 to approximately $350,000 going forward, that should completely eliminate the deficit with no benefit cuts for the next 75 years. This is just one potential solution that could be implemented immediately. With this option everybody plays a part in the solution but wealthy people paly a bigger part. Everybody is affected because FICA taxes would be increased by .8% for everyone. Wealthy people will experience a higher tax increase measured in dollars because much more of their earned income will be subject to FICA taxes when the earnings cap is raised from $118,500 to $350,000. Compromise has always been a major part of our two party political system, although recently compromise has been hard to come by. A good compromise involves both sides making a sacrifice and both sides also receiving a benefit. That is exactly what happens with this proposed fix. The people who are not considered wealthy make the sacrifice of paying more FICA taxes with the .8% tax increase but they also benefit because their benefits will not be cut. A benefit cut for many of these people could be especially harmful, making it much harder for them to maintain a decent standard of living in retirement. The wealthy also make the sacrifice of paying the higher FICA tax but make the additional sacrifice of paying that higher tax on more of their earned income with the earnings cap increase to $350,000. They will also benefit because when it comes time to claim Social Security their benefits are going to be bigger because of the additional FICA taxes they had to pay. The longer the politicians wait the more expensive it becomes to fix the system. They need to compromise and fix the system now, in this case, it does not pay to wait.
