Written by Joshua Ravichandran
There’s a serious financial issue facing Social Security. The program is projected to have a $13.6 trillion dollar gap between how much money it takes in compared to how much money it pays out over the next seventy five years (US Department of Treasury). So this raises the question. How can we address the funding gap?
The big financial problem is that the program pays out more than it takes in. There are two main reasons why this has happened. First, the average life expectancy has increased (Folger, 2023). Social Security payouts work by providing elderly people a steady stream of payments each month. As people start to live longer, it means that the government has to pay them out longer. This thereby increases the cost of spending and how much the government pays out.
The second reason for the funding gap is that Americans are having less children. (Folger, 2023). Social security works by having the current working generation pay for the generation above them. If there’s less young people working, then there’s less money going into the system.
Since the primary issue with social security is that eventually there will be more money going out than coming in, this means that all long-term solutions either have to reduce how much the Federal government pays out or increase how much the Federal government takes in.
Increasing Funding:
The first possible solution would be to increase the FICA tax percentage (Konish, 2023). The FICA tax, which stands for the Federal Insurance Contribution Act, is the primary way the government funds Social Security. When the program was first introduced in the 1930s, the FICA tax was only 2%. Throughout the 1950s to the 1990s, the FICA tax increased from 3% to 12.4%. However, the federal government has not increased the percentage since the 1990s (Shoffner, 2010). It is estimated that if the FICA tax was increased from 12.4% to 15.23%, it would be enough to address the funding problems over the next seventy five years (Luhby, 2023).
Another solution that involves taking in more money would be taxing a larger tax base. Currently, the FICA tax is capped on the first $168,600 of income. This makes the payroll tax system regressive, because people earning less than $168,000 pay a larger percentage of their income as tax than those earning above $168,000. It is estimated that by removing the tax cap, it would generate up to 90% of additional revenues needed to address the solvency crisis (Romig, 2016).
Reducing Costs:
When it comes to reducing costs, the Federal Government could increase the early retirement age when Social Security benefits first become available. When the program was first introduced, the age at which social security benefits would first become available was 65 years old. In 1956, an option for early retirement was introduced where recipients could start receiving benefits at the age of 62. However, the system is designed so that recipients who opt for the early retirement age receive less in monthly payments, so the average expected total payment would be the same regardless if they choose to retire at 65 or at 62.
Back when the program was first introduced, the average life expectancy of a working adult was only around 68 years of age. Today, the average life expectancy is around 80 years of age. This means that based on the standard retirement age of 65, Social Security will have to pay out an additional twelve years of payments than originally intended. If the retirement age in which social security benefits became available was raised to 69 years old, then it is anticipated that it would address half of the projected funding issues (Bovjerg, 1998). In addition to raising the retirement age, the early retirement age would also need to be raised by a similar amount. Research has also shown that if the retirement age continues to increase by one additional month every two years, then it would address 72% of the projected funding issues (Bovjerg, 1998).
Another way to reduce the costs of social security would be to reduce the existing benefits. However, there are serious costs associated with this as millions of people rely on social security for support. One revision to this solution that has been proposed is to only adjust the benefits for high-income individuals. The way social security is constructed is that as you earn more money, the program pays out less for each dollar you put in. Advocates for this solution argue that the benefits at the higher income-levels should be reduced even further (Konish, 2023).
In conclusion, there are many possible ways to fix the Social Security funding issue. Each of them comes with their own costs and benefits, which makes actually solving the problem difficult. It is likely that some combination of these solutions will be implemented as the funding issue continues to grow. In the meantime, the program is still expected to payout up to 80% of promised benefits even if the funding issue persists. This implies that while Social Security needs to have financial revisions done to preserve the current promised benefits, the system will still exist in some capacity if the funding issue is not addressed today.
Sources:
Bovbjerg, B. B. D. (1998). Social security reform: Raising retirement ages improves program solvency but may cause hardship for some. United States General Accounting Office. https://www.gao.gov/assets/t-hehs-98-207.pdf
Folger, J. (2023). Why is Social Security Running Out of Money?. Investopedia. https://www.investopedia.com/ask/answers/071514/why-social-security-running-out-money.asp
Konish, L. (2023, November 8). Social Security’s trust funds may run out in 2034. these changes may help. CNBC. https://www.cnbc.com/2023/11/08/these-changes-may-fix-social-security-before-2034-benefit-shortfall.html
Luhby, T. (2023, April 8). Fixing social security involves hard choices | CNN politics. CNN. https://www.cnn.com/2023/04/08/politics/social-security-solutions/index.html
Romig, K. (2016, September 27). Increasing payroll taxes would strengthen Social Security. Center on Budget and Policy Priorities. https://www.cbpp.org/research/increasing-payroll-taxes-would-strengthen-social-security