A Social Security Solution?

We’ve heard that the Social Security trust fund could run out of money by 2034. But what does that mean? The recent Trustees’ Report provides some clues.

The estimate (based on the number of workers paying into the system, their wages, and those receiving benefits) is that in 2034 payroll taxes will meet 77% of inflation-adjusted benefits. In other words, if nothing is done, by 2034, money will come in from workers and will immediately go back out to beneficiaries. That dollar amount is projected to be about 77% of a worker’s expected benefit. Without any additional changes, an influx of new workers, and/or an unexpected decline in longevity, the current forecast of 77% is expected to gradually decline.

Odds are, we’ll be able to figure out a fix by 2034. But how? What could it look like? Recently, 200 Democratic co-sponsors in the House of Representatives gave their support to legislation that would keep the Social Security trust stable (and full benefits coming) for at least the next 75 years.

The bill is not likely to become law (unless there are significant changes to the current residents of the Senate and White House). Nevertheless, what is the proposal?

Currently, Social Security taxes (6.2% of wages) are levied on a workers’ wages up to $132,900. After a worker exceeds that threshold, no additional Social Security taxes are withheld from their wages. The proposed legislation maintains the same threshold but would restart payroll taxes on income over $400,000. In addition, the legislation gradually raises the payroll tax from its current 6.2% to 7.4% by 2042.

In return, all Social Security beneficiaries would receive a 2% increase in benefits, and annual benefits would increase a little quicker. Current benefits increase based on the change in the Consumer Price Index. The proposal would tie the annual increase to the Consumer Price Index for the Elderly (CPI-E). This measure is more sensitive to medical inflation and other costs that impact seniors. In addition, higher-income seniors would get a bit of a tax cut as less of their Social Security income would be taxed.

While not in this bill, but perhaps worth reviewing, is allowing the Social Security trust fund to invest a portion of its assets in equities (right now Social Security assets are solely invested to Treasury-related securities).

We expect to hear more proposals about Social Security solvency in the upcoming presidential election.