Fixing Social Security

For quite a while now we’ve been reading the reports from the Social Security Administration’s reviews of the status of the trust fund – where the prediction is that we’ll end up in the year 2033 with only enough money to pay 77¢ on the dollar of the promised benefits from Social Security. So far this revelation has not resulted in policymakers’ taking any actual steps to fix things, but sometime someone has to act. What can be done about fixing Social Security?

What Can We Do About Fixing Social Security?

As future recipients of benefits, we have some actions we can take to reduce our reliance on Social Security benefits. This won’t fix the problem with the underfunding of the system, but it may help your own situation.

Push for pensions.  As workers, we may have some power to push our employers to consider offering pensions again. It can be a cost tradeoff for the employer versus the cost of other benefits, but a pension could be an attractive feature to assist with employee retention. It may sound impossible, but it has happened recently with state workers in Connecticut.

Increase other retirement savings. Maxing out your 401(k) contributions and choosing proper investment diversification is one good way to supplement a dwindling or reduced Social Security benefit. You can also make contributions to a Roth IRA (within limits) and make non-deductible contributions to your 401(k) of some significant amounts (see A New Way to Fund Your Roth IRA).

What Policy Changes Can Be Enacted for Fixing Social Security?

As you might expect, there are plenty of actions that can be taken by Congress to fix the problem. Listed below are just a few that, while they’re tough-love-type actions, could resolve the problem with Social Security’s underfunding more or less permanently.

Eliminate the earnings cap. Presently only a certain amount of annual earnings is subject to Social Security taxation, unlike Medicare taxation which has no limit. For 2015 this limit is $118,500 ($117,000 in 2014) – any earnings above that limit are not subject to the combined 12.4% (employer and employee) Social Security tax. Eliminating this limit or cap would result in a significant amount of additional funds added to the Social Security tax revenues annually. Presently this cap covers approximately 83% of all earnings – leaving up to 17% of all earnings untaxed.

Increase the tax rate. Currently the Social Security tax rate is 12.4% on applicable earnings (as explained above). This is 6.2% from the employee’s gross pay, and a complementary 6.2% from the employer. Any increase in this tax rate would improve the trust fund as well.

Means testing. For folks with significant other sources of retirement income, Social Security benefits could be reduced or eliminated. After all, this is a social insurance program, intended to provide benefits to folks who have insufficient means to provide for themselves. It’s frustrating that saving for yourself might put you in a position to receive reduced benefits, but that’s just the sort of tough decisions that we as a society have to make.

Increase retirement age. This has been done before, and likely will be done again sometime in the future. In 1983 the “normal” retirement age for Social Security was raised from 65 to 66 for folks born between 1943 and 1954, and up to age 67 for folks born in 1960 or later. It’s not out of the question to increase this normal retirement age another year gradually, up to age 68 for folks born in 1966 or later.

At the other end of the spectrum, the early retirement age has been 62 since the Social Security program was first put in place. Changing this age would likely result in some positives for the trust fund, but leaving it the same has the insidious result of providing even less benefits for folks who file early. If the normal retirement age was increased to 68, filing at 62 would result in reduction of 35% from your normal retirement benefit amount.

Conclusion

No matter what we do it won’t be pleasant. It’s never easy to give up something that you’ve been promised. The problem is that if we don’t do something about it, we’ll be certainly giving something up, estimated at 23% of benefits. It’s going to be interesting times in the coming 18 years – I hope we can get the folks in Congress to take action sooner rather than later. In the meantime, push for a pension from your employer, and max out your own savings… it’s all you can do at this point.