20 Ways to Fix Social Security, From the Logical to the Absolutely Insane
By Sean Williams - The Motley Fool
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News flash, America: Social Security is in trouble.
According to the latest estimates in the Social Security Board of Trustees 2016 report, seniors' most vital social program is just 17 years away from exhausting its $2.8 trillion in spare cash. If the trust funds run dry, the Trustees predict that an across-the-board benefits cut of up to 21% may be needed to sustain payouts through 2090. For the roughly 25 million retired workers who currently count on Social Security for at least half of their monthly income, this is a terrifying outlook.
If there's good news, it's that the program will remain solvent. Social Security benefits are primarily covered by payroll taxes, which means that as long as people keep working, Social Security will always be generating revenue. However, the way things are going, today's payout rates won't be sustainable beyond 2034.
Congress needs to act decisively, and soon, to fix Social Security -- and our federal legislators have a number of potential solutions to choose from. However, partisan bickering has made it all but impossible for the two predominant parties to find a middle ground.
Here are 20 Social Security solutions that have been proposed. Some would partially or completely eliminate the estimated $11.4 trillion long-term budgetary shortfall. Others would actually cost the program more money by making benefits more generous. And still other ideas are nothing short of insane.
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1. Raise the Social Security earnings cap
One of the most logical solutions presented to fix Social Security, and one that is commonly offered by Democrats, is to raise Social Security's maximum taxable earnings. As of 2017, earned income between $0.01 and $127,000 is taxable at 12.4%, with employers and employees usually splitting this payroll tax down the middle at 6.2% each. This means that the approximately 10% of Americans who earn more than $127,200 annually have at least some of their income untouched by the payroll tax.
For instance, the recently reintroduced Social Security 2100 Act would reinstitute the payroll tax on earned income over $400,000. In simpler terms, earned income between $0.01 and $127,200 would be taxed, then a moratorium would exist on earned income between $127,200 and $400,000, followed by a reinstitution of the payroll tax at earned income above $400,000.
2. Eliminate the Social Security earnings cap
Taking the first point a step further, another Social Security fix would eliminate the payroll tax earnings cap altogether. In other words, every cent of earned income would be subject to the 12.4% payroll tax. Since it would only impact about 10% of the population, this solution has a lot of public support. It would also completely eliminate Social Security's budgetary shortfall.
On the flip side, the wealthy would get something of an unfair shake. Despite paying more into the program, they wouldn't get increased benefits, because Social Security's monthly benefit is capped (at $2,687 in 2017).
3. Raise the full retirement age
Another logical solution to save Social Security for the long term includes raising the full retirement age (FRA), or the age at which the Social Security Administration (SSA) deems you eligible to receive 100% of your monthly benefits. Your FRA is determined by your birth year.
Why raise the retirement age? The simple answer is that it would account for Americans' increasing life expectancies by forcing retirees to wait longer to collect 100% of their benefit -- or accept a larger reduction in their monthly payout by claiming early. Changing the FRA would likely reduce benefits for future generations of workers, but it would save the program a lot of money. It's a fix commonly suggested by Republicans.
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4. Change the cost-of-living measure to the CPI-E
Not every proposed Social Security "fix" is intended to shore up the program's finances. In fact, many think Social Security doesn't pay quite enough to its retired beneficiaries. One popular change that many Democrats support involves altering how Social Security makes its annual cost-of-living adjustments.
Right now, the Social Security Administration uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) as a measure of inflation to determine how much of a raise beneficiaries receive each year. This proposed solution would switch that measure to the Consumer Price Index for the Elderly (CPI-E).
The CPI-E specifically takes into account the spending habits of households with persons aged 62 and up. The thinking is that the CPI-E would more accurately reflect the housing costs and medical expenses that seniors face. The downside of this fix is that while it would almost certainly increase monthly payouts for seniors, it would deplete Social Security's Trust even faster.
5. Change the cost-of-living measure to the Chained CPI
If there's such a thing as the opposite of the CPI-E, it's the Chained CPI. This more conservative measure of inflation is favored by many Republicans.
The Chained CPI accounts for "substitution" -- that's when consumers start buying cheaper goods and services as other ones become too expensive. The CPI-W does not factor in substitution, therefore moving to the Chained CPI would result in lower annual raises. That would lead to a modest improvement in Social Security's cash position, but it would be bad news for retirees who count on those annual raises to help cover rising medical and housing costs.
6. Freeze the purchasing power of benefits for the wealthy
Though not nearly as popular as the aforementioned fixes, the idea of freezing the purchasing power of the upper-middle class and wealthy has been floated on Capitol Hill.
Under this proposal, Social Security recipients below a certain income threshold would be eligible to receive an annual cost-of-living increase in their benefits (assuming the CPI-W warranted one), while those above the threshold would see their benefits remain the same (i.e., frozen). As the price of goods and services increases over time, the purchasing power of the benefits paid to wealthier seniors would decline. Estimates suggest that going this route could eliminate more than half of the program's long-run cash shortfall.
7. Freeze the purchasing power of benefits for everyone
Taking things one step further, others have proposed the (unpopular) and somewhat ridiculous idea of freezing the purchasing power of benefits for every single Social Security recipient. In such a scenario, everyone's current benefits would remain static as the price for most everything else rose around them. This would be particularly harmful to low- and middle-income Americans.
On the other hand, freezing the purchasing power of benefits for everyone would essentially close Social Security's long-term budgetary shortfall.
8. Means-test for benefits
An intriguing idea offered up by President Donald Trump during the early stages of his campaign was means-testing for benefits. Means-testing would involve setting an annual income threshold, and seniors earning more than the threshold would get a reduced payout or no payout at all.
Why means-test? The thinking here is that seniors earning a lot of money -- say, $100,000 annually -- probably won't be reliant on their Social Security income during retirement. Thus withholding some or all of this payment could extend the life of the program. Models have suggested that means-testing would modestly shrink the long-term cash shortfall.
9. Progressively link longevity to benefits
The bipartisan Save Our Social Security Act of 2016 presented perhaps the most sensible idea with regard to adjusting Social Security for greater life expectancies: index the full retirement age for longevity. In other words, the full retirement age would increase in step with life expectancies, as would the age at which delayed-retirement credits max out (which is currently age 70).
Why index benefits to life expectancy? One of the biggest issues for the program is that Americans' life expectancies have risen far faster than Social Security's full retirement age. That means retirees are drawing benefits for a much longer period of time. Indexing would presumably encourage seniors to wait longer to file for Social Security, and it would lower the average amount of time that seniors spend drawing benefits.
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10. Use the estate tax as a means to cover the shortfall
Lawmakers at some point proposed the (bad) idea of utilizing the estate tax to help mitigate the expected long-term budgetary shortfall in Social Security. The estate tax, also known as the death tax, is a tax levied on the assets of estates worth more than $5.49 million for an individual, and double that for a couple, as of 2017. Implementing this change would redirect estate tax revenue away from the federal government's general funds and toward Social Security.
You can probably guess why this isn't a great idea: It's merely a transfer of problems from one area of government to another. On top of that, Trump's latest tax plan proposes eliminating the estate tax, so this solution may not even be a possibility before long.
11. Transfer start-up costs to general government revenue
Chalk this one up as one of the head-scratchers: One suggestion is to transfer Social Security's start-up costs to general government revenue.
When Social Security came into being eight decades ago, people were paying far more into the program than it paid out in benefits. Over eight decades, these "start-up costs" have been baked into the program. The idea would be to remove these costs, transfer them to general government revenue, and tie each generation's benefits to what it pays into the program. Essentially, it would make Social Security budget-neutral. Unfortunately, though, it would necessitate immediate tax hikes or benefit cuts if implemented.
12. Phase out or end the taxation of benefits
Here's another "solution" that aims to increase the amount Social Security beneficiaries receive, rather than to plug the leak in Social Security's trust fund. In December 2016, Rep. Sam Johnson (R-Tx.) introduced the Social Security Reform Act of 2016. One of its more interesting proposals was to phase out the taxation of Social Security benefits by 2045 and eliminate them completely by 2054.
Individuals earning more than $25,000 annually, and couples filing jointly with more than $32,000 in annual income, have at least some of their Social Security benefits taxed. Johnson's bill would end the practice of taxing Social Security benefits, which would be a plus, given that the tax thresholds haven't been adjusted in 34 years. The upside is that it would put more money back in the pockets of seniors. The downside is that it would eliminate a revenue stream that brought in $31 billion for the program in 2015.
13. Eliminate the retirement earnings test
Another intriguing component of Johnson's Social Security Reform Act of 2016 would eliminate the retirement earnings test, which affects seniors who are working and receiving benefits but haven't reached their full retirement age.
Here's how this works in 2017: For every $2 in wages above $16,920 in income, the SSA can withhold $1 in benefits if you haven't reached your FRA and won't do so during the calendar year. If you will reach your FRA later this year, the SSA can withhold $1 in benefits for every $3 in wages above $44,880 until you reach your FRA. Though you will theoretically get these withheld payments back in the form of a higher benefit after your FRA, the fact that the SSA can withhold benefits prevents seniors from "double-dipping" with a job and their retirement benefits. Eliminating the retirement earnings test would allow seniors to keep this income up front. Unfortunately, it wouldn't help to eliminate the Social Security cash shortfall.
14. Allow for a partial or full privatization of the program
A number of Republican lawmakers, including both President Trump and Vice President Mike Pence, have advocated for a partial privatization of Social Security. In simpler terms, a small percentage of an individual's retirement benefits would be placed into a retirement account that they could invest as they see fit.
The advantage for the federal government is that it pawns off a portion of the retirement responsibility on Americans, and it theoretically gives people the chance to top the rather small returns generated by Social Security's spare cash, which is invested in special-issue bonds and certificates of indebtedness. The downside? Financial literacy is tragically low in America, which means Americans could make poor investment choices that leave them in even worse financial shape come retirement.
15. Offer seniors a buyout
A decade ago, Republican presidential candidate Mike Huckabee proposed a pretty wild idea: He suggested that wealthy individuals who wouldn't be reliant on Social Security be offered a one-time buyout. The idea was that these wealthy individuals could buy a tax-free annuity with their buyout, freeing the federal government from making payments to these well-to-do folks.
While tax-free annuities would likely be appealing to wealthier individuals looking to reduce their federal tax liability during retirement, this solution didn't get a lot of attention because it would only have had a minimal impact on the long-term budget shortfall.
16. Eliminate the payroll tax in lieu of a value-added tax on consumption
Arguably the most insane idea of the bunch was recently floated by Republican lawmakers: eliminating the payroll tax -- Social Security's main source of funding -- and replace it with a value-added tax on consumption.
Why eliminate the SSA's payroll tax? Removing the 6.2% that most workers pay means $3,100 more in the pockets of the average American family each year. Since we're a consumption-based economy, that extra cash would likely boost U.S. GDP growth.
But herein lies the issue: Social Security would need a new source of funding, as payroll taxes supplied 86.4% of its revenue in 2015. It would also make the program dependent on consumption, which can swing wildly during periods of growth and recession. It's a pretty crazy idea.
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17. Increase payroll taxes across the board
A surefire way to eliminate Social Security's budgetary shortfall is to increase payroll taxes across the board for all working Americans. This would mean benefits stay consistent for current and future retirees, but it also means current workers would have to make do with less, which could impact their already poor savings habits.
How much would payroll taxes need to be raised? According to the Social Security Board of Trustees, the actuarial deficit in 2016 was 2.66%. It means the payroll tax would need to be increased by 2.66% to 15.06% from 12.4% to cover the long-term shortfall through 2090. Since most workers split this tax with their employer, it means they'd pay an extra 1.33% out of every paycheck. Since taxes aren't too popular with the public, this surefire solution has received minimal support, at least at the proposed tax level. Smaller tax increases have received more public support.
18. Cut benefits on everyone right now
Another surefire solution that has even less support from the public (and especially seniors) is the idea of cutting benefits for everyone right now. The Trustees report has already declared that the trust fund's depletion is imminent, so this solution is based on the idea that we should adjust to a lower payout well in advance.
The benefit to this solution is that it fixes Social Security's 75-year shortfall. The downside is also obvious: Everyone loses up to 21% of their monthly retirement benefits from Social Security at the flip of a switch.
19. Do nothing and raise taxes in 2034
And then we have what could construed as one of the laziest and most unpopular Social Security fixes for working Americans. This plan would advocate doing nothing over the next (estimated) 17 years and then raising payroll taxes once the trust's cash coffers are dry.
Once again, this plan completely eliminates any cash shortfall, but it comes with two major downsides. First, there would be an immediate jolt to working Americans in the form of a suddenly higher payroll tax. Secondly, this payroll tax increase would be significantly higher than the 2.66% actuarial deficit suggested by the 2016 Trustees report. As the budgetary shortfall steadily grows, so does the payroll tax increase necessary to close it.
20. Do nothing and cut benefits in 2034
Last but not least, we have what may arguably be described as the least popular solution of all among the public: doing nothing and simply cutting benefits when the Trust exhausts its spare cash in 2034.
Like many of the other unpopular solutions, cutting benefits would resolve the problem, but it would be a devastating blow to those receiving benefits at the time. It would also be bad news for future generations of retirees, as it would result in a benefits cut of up to 21%.
It's unlikely that Congress will simply let Social Security's trust fund run out, but there's no indication of how lawmakers will patch the program up. Based on history, the only thing we can be sure of is that there will be a good deal of bickering, stalling, and can-kicking on Capitol Hill before a solution is agreed upon.
