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Fixing Social Security involves hard choices

<i>Kevin Dietsch/Getty Images</i><br/>There's a reason why politicians have long shied away from addressing Social Security's massive financial problems. The commonly proposed solutions involve cutting benefits or raising taxes
Getty Images
Kevin Dietsch/Getty Images
There's a reason why politicians have long shied away from addressing Social Security's massive financial problems. The commonly proposed solutions involve cutting benefits or raising taxes

By Tami Luhby, CNN

There’s a reason why politicians have long shied away from addressing Social Security’s massive financial problems. The commonly proposed solutions involve cutting benefits or raising taxes, which would spark an outcry from a range of powerful constituents, including senior citizens and the business community.

The situation, however, is only growing more critical. The combined Social Security trust funds are projected to run dry in 2034, according to the latest annual report from the entitlement program’s trustees that was released last week. At that time, the funds’ reserves will be depleted, and the program’s continuing income will only cover 80% of benefits owed.

The estimate is one year earlier than the trustees projected last year.

About 66 million Americans received Social Security benefits in 2022. It’s a vital lifeline for many of them. Some 42% of elderly women and 37% of elderly men rely on the monthly payments for at least half their income, according to the Social Security Administration.

Though congressional Republicans’ drive to cut spending amid debt ceiling negotiations this year has prompted renewed interest in the entitlement’s finances, little is likely to happen, experts say. The insolvency date is still too far in the future.

The last time Congress enacted a major overhaul, in 1983, Social Security was only months away from being able to pay full benefits. At that time, Democratic lawmakers who controlled the House agreed with Senate Republicans and then-GOP President Ronald Reagan to increase payroll taxes and gradually raise the full retirement age from 65 to 67, among other reforms.

While President Joe Biden has promised to strengthen Social Security and defend it from any cuts by Republicans, he has yet to lay out a concrete vision for protecting the program. It was not included in his annual budget proposal this year, though he did suggest a financial fix for Medicare, which is facing its own solvency issues.

Asked about the president’s plan, the White House said that the budget “clearly states his principles for strengthening Social Security.”

“He looks forward to working with Congress to responsibly strengthen Social Security by ensuring that high-income individuals pay their fair share, without increasing taxes on anyone making less than $400,000,” said Robyn Patterson, assistant press secretary at the White House.

Options to save money by cutting benefits

A multitude of proposals have been floated over the years to address Social Security’s shortfall, many of which have multiple measures.

Several options focus on saving the entitlement program money, though left-leaning advocates and senior citizen groups are quick to point out that these moves are actually benefit cuts that they would strenuously oppose.

One common proposal is raising the retirement age. Currently, Americans can start collecting Social Security benefits at 62, though doing so would reduce their lifetime payments by as much as 30%.

The full retirement age, which had been 65 for much of the program’s existence, is slowly rising to 67 for Americans born in 1960 or later.

Some policymakers advocate for raising the full retirement age to 70 for future retirees, bringing it more in line with changes in life expectancy. That would mean those retiring earlier than that would get smaller monthly checks than under current law.

Doing so could wipe out about a third of the Social Security trust fund’s 75-year deficit.

Last year, the conservative Republican Study Committee released a budget plan that called for raising the full retirement age for future retirees at a rate of three months per year until it is increased to 70 for those born in 1978. It would then link the retirement age to future increases in life expectancy, as well as adjust the number of working years included in benefit calculations to 40 years, up from 35 years.

Other options include reducing benefits for higher-income Americans, which was also included in the Republican Study Committee’s budget plan.

New retirees’ Social Security benefits are one-third higher today than they were for folks who retired 20 years ago, even after accounting for inflation, according to Andrew Biggs, senior fellow at the right-leaning American Enterprise Institute. Plus, the maximum Social Security benefit in the US is two to three times higher than the maximum retirement benefit in Canada, the United Kingdom, Australia and New Zealand.

Biggs supports placing a cap on the maximum benefit that the highest-earning retirees can receive. The maximum benefit this year is about $43,000 and will rise to $59,000 by 2050, he said. Though such a cap would only solve about 10% to 15% of the long-term solvency gap, Biggs argues it’s one step, and it only affects those who he says don’t depend on the benefits.

“We’re going way, way beyond a pure safety net program,” Biggs said at a recent webinar hosted by the Committee for a Responsible Federal Budget, a government watchdog group. “Here we’re looking at a retirement program for middle income and upper income people.”

Other suggestions that have been floated include changing the formulas that determine the benefits Americans get upon retirement or the annual cost-of-living adjustment retirees receive to slow the growth of payments.

Options to raise more revenue

The main way to bring more money into the Social Security system is to increase the amount of payroll taxes collected.

A proposal popular among Democrats and left-leaning experts is to lift the wage cap so that higher-income earners have to shell out more in payroll taxes.

The Social Security tax rate of 6.2% is levied on both employers and employees, for a total rate of 12.4%. However, in 2023, it’s only applied to annual wages of up to $160,200. (By contrast, Medicare’s 2.9% total payroll tax rate is applied to all wages, and higher-income Americans are subject to an additional 0.9% Medicare tax.)

When payroll taxes for Social Security were first collected in 1937, about 92% of earnings from jobs covered by the program were subject to the payroll tax, according to the Congressional Budget Office. By 2020, that figure had fallen to about 83% as income inequality has increased.

Several congressional Democrats have floated proposals to raise the amount of wages subject to the payroll tax. Rep. John Larson of Connecticut wants to apply the payroll tax to wages above $400,000, which he says would extend the program’s solvency by nine years.

Vermont Sen. Bernie Sanders, an independent, and Massachusetts Sen. Elizabeth Warren, a Democrat, introduced a bill earlier this year that would make multiple changes to Social Security, including subjecting all income above $250,000 to the payroll tax and applying it to investment and business income. They say their reforms would extend the entitlement’s solvency for 75 years.

But changing the wage cap could also alter the fundamental design of Social Security, in which retirees’ benefits are tied to the amount of taxes they paid into the system while working.

For instance, the proposal from Sanders and Warren would not credit the additional taxed earnings toward benefits. That would increase the beneficial impact on solvency but would also raise resistance among some advocates who believe the link between taxes and benefits should be maintained.

Another option is raising the payroll tax rate. Increasing it to a total of 16% would just about assure 75 years of solvency, said Marc Goldwein, senior policy director for the Committee for a Responsible Federal Budget.

Most lawmakers, however, would not find that type of tax hike very palatable, particularly not Republicans who control the House.

While experts disagree on the best way to address Social Security’s shortfall, one thing they are generally united on is that waiting will only result in having to employ harsher solutions. But that isn’t spurring elected officials to action.

“Nobody’s acting as if that’s something they’ve got to take seriously,” Biggs said. “So I’ll just be honest and say I’m worried about how this thing plays out.”

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