Retirement

Changes Must Come To Social Security

Changes will be made in Social Security. The questions are: What will they be? When will they be made?

If nothing is changed, the Social Security retirement trust fund will run out of money. The 2020 report from the trustees of Social Security estimated that would occur in 2034. But that estimate was based on data through the end of 2019, before the pandemic recession reduced payroll tax revenue and caused many people to begin collecting retirement benefits earlier than they had planned.

The trustees won’t issue an updated report for a few more months, but it likely will estimate the trust fund will run out of money before 2034. Other sources have estimated the trust fund will be exhausted between 2030 and 2032.

Social Security won’t end when the trust fund runs out of money. The program receives payroll taxes each year, and those are estimated to be enough to pay 75% to 80% of promised benefits indefinitely.

But if Congress doesn’t act, when the trust fund is empty there will be an automatic across-the-board 20% to 25% reduction in all benefits.

During the 2020 campaign, Joe Biden proposed changes to Social Security similar to those in Congressman John Larson’s (D-CT) Social Security 2100 Act.

Biden proposed increasing the guaranteed minimum benefit to 125% of the federal poverty level, increasing benefits by 5% to those who’ve been receiving them for at least 20 years, and increasing payments by 20% to widows and widowers. He also would increase the annual cost of living adjustment in benefits.

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The benefit increases would be paid for by imposing Social Security payroll taxes on salaries above $400,000. The taxes currently aren’t imposed on wages above $142,800. In addition, over time the payroll taxes would be phased in on wages between $142,800 and $400,000. Larson also would gradually increase the payroll tax rate to 14.8% from the current 12.4%.

But those taxes at best would allow the trust fund to remain solvent for only a few more years, depending on the economic assumptions used.

The opposite approach to improving Social Security’s solvency was proposed by former representative Sam Johnson (R-TX) in the Social Security Reform Act of 2016. This proposal would move Social Security closer to its roots as a program providing only a minimum income to older Americans regardless of the amount of taxes they paid into the system.

Johnson’s proposal, like the Biden and Larson proposals, would raise the minimum guaranteed benefit and increase benefits of those who’ve been receiving them for a long time. It also would eliminate income taxes on benefits.

The Johnson plan also would raise the retirement age, reduce benefits for those with higher lifetime incomes, reduce cost of living adjustments, and limit benefits for spouses and children of higher-income earners.

Once the Social Security trustees issue their 2021 report updating the solvency of the system, there is likely to be more urgent thinking and discussions about reforming the system. With the demise of the trust fund about 10 years away, most in Congress will realize it’s time to act.  

To close the gap of 20% to 25% of promised benefits, some combination of higher taxes and lower benefits must occur. If some benefits are increased, others must be decreased or taxes must increase even more.

The Biden, Larson, and Johnson proposals cover the range of possible actions, and the final product from Congress is likely to include elements from all the proposals.

I expect Congress will protect the benefits of those already retired and who are old enough to retire in the next five to 10 years, except perhaps for those with high incomes or net worths. It is likely to increase benefits for at least some of those already retired or near retirement, as all the proposals discussed do.

Some forms of additional means-testing are likely Those with higher incomes might pay higher income taxes on their Social Security benefits or receive lower benefits than under the current benefit formula.

Higher-income Americans who are still working will pay some version of the Biden and Larson payroll tax increases. The real question is whether the payroll tax rate will be increased, especially on incomes below the current payroll tax ceiling of $142,800.

Congress then will have to decide whether to maintain the promised benefits for future retirees or change them. Any changes are likely to favor lower-income workers over higher-income workers as all the proposals to date would do.

Keep in mind the program already has significant means-testing and is skewed to give lower-income workers higher benefits per payroll tax dollar than higher-income workers, as I discuss in my book Where’s My Money: Secrets to Getting the Most out of Your Social Security (Regnery). Increasing means-testing would make Social Security more of a wealth-transfer program and less of a retirement-savings program.

One problem for Social Security reformers is the program now has a mixture of goals and objectives. Initially, Social Security was intended to provide a minimum income to all older Americans regardless of their contributions to the system. Then, it became more of a retirement savings program.

More features and objectives were added over the years. Disability benefits and benefits for widows and widowers and for children all were enhancements. Cost of living adjustments were another addendum. These additional benefits were funded on a pay-as-you-go basis.

Congress should decide if the program should continue to be a combination of retirement savings and income distribution or only social insurance. One good suggestion, from economist William Reichenstein, is to separate the two goals and determine separate funding for each set of programs.

Whatever details Congress settled on, when it’s over I expect today’s beneficiaries and those who are likely to be beneficiaries in a few years will be in the same position or better off than they are today (except for those with higher incomes). Those younger than 45, especially those with higher incomes, will be worse off than under the current system. Except for those with lower incomes, they’re likely to pay higher lifetime taxes and receive lower benefits than under today’s system.

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