It should come as no shock to anyone that it is only a matter of when the current way Social Security benefits will need to be adjusted, not if. When it comes to how and when it should happen is the proverbial elephant in the room. It’s safe to say that the “when” has been here for a while and the “how” has also been discussed for years by policy makers. But as we know all too well; no politician will ever get elected or re-elected by running on a platform that includes proposed changes that would be detrimental to Social Security benefits.
I wrote on this topic in March of last year and I can safely say that absolutely nothing has been done yet to try and fix the situation.
Current Situation
The Social Security Trust Fund is currently estimated to run out of money by 2032, two years sooner than the last estimate from the government. If nothing is done to change the situation, when the trust fund money runs out, benefits will be cut for all current and future recipients by 23%. The current law dictates that trust fund spending cannot exceed dedicated revenue from Social Security taxes.
All this could be accelerated if current actuarial estimates are wrong and funds dry up sooner. That will likely be the case since over the past several years, the depletion rate has only
increased moving the exhaustion date closer and closer. Given that this election cycle has seen more references to the impending depletion of the Social Security Trust Fund than past cycles, I thought it a good time to review the situation and proposed fixes.
A Quick History – Flawed from the Start
Social Security Act
- The act was signed into law in 1935 by Franklin D. Roosevelt.
- Payouts began in 1940, well before enough funding from Payroll Taxes had been collected.
- To put it in perspective, the 65-year-old recipient of the historic first Social Security check issued, received nearly 1,000 times what they paid into the system before their death.
- While benefits stayed unchanged in the original program, Cost of Living Adjustments (COLAs) were enacted in 1975 to compensate for inflation putting additional pressure on the system.
What’s the Other Problem?
A structural problem with the program is the age at which Social Security kicks in.
- Life Expectancy When Program Began in 1940
- Women – 62
- Men – 58
- Life Expectancy in 2024
- Women – 80
- Men – 74
Demographic and fiscal challenges threaten Social Security’s ability to pay full benefits. In 1960,
5.1 workers paid into Social Security for each beneficiary. Today, that figure has fallen dramatically to just 2.7 workers per beneficiary. By 2035, the projection is 2.3 workers per beneficiary. The cost of benefits has exceeded the program’s payroll tax revenue every year since 2010, drawing down Social Security’s trust funds.
It’s simple; the Social Security Trust Fund is running out of money because people are living longer and fewer people are paying into the system.
What Solutions Are Being Debated?
Given that this discussion has been going literally for decades with no action whatsoever, I want to focus what I feel are some of the most likely changes that in one form or another (likely a combination of some) will have to happen before 2032. That date could even move closer given that only a few years ago, the depletion estimate was 2035.
- Raise the Full Retirement Age (FRA)
- Increases began in 1938 slowly reaching 67 yrs old for those born in 1960 or later.
- Those born before 1960 reach full retirement age at 66 and 10 months.
- No more changes are currently scheduled.
- Raise the Payroll Tax
- Currently 12.4%, unchanged since 1990
- As an employee, you only pay half of that amount with the employer paying the rest.
- If you are self-employed, you pay the full 12.4%
- Raise the Payroll Tax Cap – the maximum amount of wages that are taxed
- Currently $168,000 for 2024, up from $160,200 in 2023.
- Means Test High Earners
- Phase out benefits for high earners
Where to Start
Without trying to go too deep in the weeds, here is my quick take on options frequently being discussed with pros and cons.
Raise the Retirement Age
- Keeps Social Security solvent but will decrease total lifetime payouts for retirees.
- Could help reset the minds of younger generations to the reality of their life expectancy.
- People who have planned to retire and begin receiving benefits at the current age will likely have to alter their plans, work longer, spend less.
- The flexible option of claiming benefits early could be eliminated.
- Proposals have suggested raising the full retirement age to 70 incrementally but could take many years and like ALL options would be highly political.
Raise the Payroll Tax
- According to an analysis from the Committee for a Responsible Federal Budget (CRFB), increasing the payroll tax by 1 percentage point (from 12.4 percent to 13.4 percent) could raise $1 trillion in new revenues for Social Security over a 10-year period and shrink the program’s 75-year shortfall gap by 28 percent.
- It doesn’t completely fix the problem but would push out the trust fund exhaustion date.
Raise the Payroll Tax Cap
- There is active talk about imposing the Payroll Tax on incomes above $400,000
- Eliminate the earnings cap but keep benefits at the same level.
- Critics claim it would not raise nearly enough money to materially close the funding gap given the small percentage of people who earn more than $400,000/year.
Means Test High Earners
- Some say it would do little to help out due to the small percentage of high earning workers.
- Would break faith with workers by reducing an earned benefit.
Wrapping Up
The general opinion of those studying these options, along with many other options I haven’t mentioned, are that reforms should encourage older Americans to continue working. Removing disincentives that penalize beneficiaries for continuing to work both promotes continued labor- force participation and increases contributions flowing into payroll taxes while recognizing older workers’ value to our economy and society. That is a lofty goal and one that has been chased unsuccessfully for several decades.
In my 15 years of researching and working closely with experts in government policy, there is an axiom that holds true year after year: Never let a good crisis go to waste! The condition of Social Security has yet to become a true crisis but eventually it will. Only then will Congress do something and you can be sure that there will be a lot of horse trading and finger pointing among the parties as potential changes, including some or all of the above, come into focus. And if trends continue the way they are, the 2032 depletion year estimate will almost certainly move up bringing that crisis moment closer and closer.
