Many Americans fear that Social Security is running out of money for good. However, while Social Security is underfunded, it’s not going away anytime soon.
Social Security actually ran a surplus between 1983 and 2010. That surplus was invested in safe assets that earned interest income. Social Security has been drawing on that interest income since 2010, when benefit costs started outpacing payroll tax revenue.
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In 2021, Social Security started withdrawing from the principal investment. If nothing changes, the funds will be depleted by 2034. Social Security won’t have enough money to pay retirees their full benefits at that time.
Social Security won’t run out entirely since workers will still be paying into the program, but payroll tax revenue won’t be enough to pay full benefits the way they are set up now. Beneficiaries will see payments reduced by roughly 25% in 2034 if changes aren’t made. However, there are several proposed solutions on the table — some more popular than others .
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Possible Social Security Funding Solutions
A recent survey done by GOBankingRates asked people what funding methods would help prevent Social Security from running out of money. They were given the following solutions and asked which would work best. Here are the survey results:
- Cutting/lowering Social Security benefits to save money — 17%
- Raising payroll taxes to boost revenue — 31%
- Raising the full retirement age — 13%
- None of the above — 40%
Although they may not be popular, each solution would help bolster the funding of the current Social Security system.
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Cutting or Lowering Social Security Benefits
Cutting or lowering Social Security benefits is one option to help improve the Social Security funding issue.
Some argue that the metric used to calculate the cost-of-living adjustment (COLA) is too generous and doesn’t reflect what retirees actually spend. Older retirees may not have many expenses beyond medical costs, for example. Different inflation gauges could be used to grow benefits more slowly or decrease them as someone ages.
Social Security benefits could also be cut for higher earners. Higher earners may not need Social Security benefits as much as others. They may have other retirement savings that they can rely on. However, this would be a complex case to make politically.
Raising Payroll Taxes To Boost Revenue
The payroll taxes we all pay out of our paychecks help fund Social Security. If you raise payroll taxes, the Social Security fund will quickly accumulate more money.
Employees and employers currently contribute 6.2% of an employee’s pay to fund Social Security. Congress could raise this to 8% to get more money for Social Security. However, this may disproportionately hurt lower-income workers who may feel that loss in take-home pay the most.
“While this is a viable option, I don’t love the idea of higher payroll taxes,” said Joe Allaria, partner at CarsonAllaria Wealth Management and founder of the Retirement Powerhour Podcast . “It’s the last thing the average American needs, especially as most are still trying to recover from inflationary pressures at the grocery store, gas pump, etc.”
Allaria continued, “However, increasing the Social Security wage base, which currently sits at $160,200, is probably a better solution. Americans only pay Social Security tax up to $160,200 currently, so increasing that number could help close the gap that exists with Social Security.”
Raising the Full Retirement Age
The full retirement age for Social Security is 67 for anyone born in 1960 or later or 66 and some months if you were born before 1960, depending on the year. You can start receiving benefits before this age, but your monthly payment will be lower. The earliest you can claim is age 62.
If you file at age 62, you will lose 30% of the full Social Security benefits you would have received at age 67. If you file at 64, you will only lose 20% of the full benefits. This continues until age 67 when you receive the full benefits that you are entitled to based on your lifetime earnings history.
Every month you wait between the ages of 67 and 70, you will receive more money. If you wait until 68, you will receive 108% of your social security benefits. This increases by 8% each year until the age of 70.
“Raising the full retirement age is another viable option, but I feel should be considered in combination with raising the early retirement eligibility age, which currently sits at 62 years old,” said Allaria. “Social Security was originally known as the OASDI (Old Age, Survivors, and Disability Insurance) programs.”
Until 1983, the full retirement age for Social Security was 65. In 1983, Congress gradually raised the age because people were living longer and were generally healthier in older age. The retirement age was gradually increased by a few months for every birth year until it reached 67 for people born in 1960 and later.
To help the funding issue, Congress could do something similar again. The retirement age could slowly increase to somewhere between 68 and 70. Raising the full retirement age would start reducing the outflow of Social Security funds.
“The fact is that people are living longer and that has forced Social Security to pay out retirement benefits for much longer than originally intended,” said Allaria
The Bottom Line
Social Security will technically never run out of money since current workers fund retiree beneficiaries. However, there will be a significant shortage if nothing is done.
While no funding solutions are popular with the American public, one or a combination of several will need to be chosen and enacted if Social Security is to continue to fund retirees the way it does now.
This article originally appeared on GOBankingRates.com : Social Security: Why 40% of People Don’t Like These 3 Funding Solutions
