You’d have to be living in a cave for the past decade to be unaware that Social Security will be facing significant funding challenges in about 10 years. If Congress doesn’t act to close the funding gap, retirees could face benefit reductions of roughly 20% to 25%.
Predictably, our political leaders can’t agree on the method they should use to close this cap. Most Democrats want to close the gap with tax increases, while many Republicans want to close the gap with benefit reductions. However, responding to pressure from President Joe Biden, House Speaker Kevin McCarthy recently promised that Social Security benefits’ cuts would be off the table with respect to the looming battle over the debt limit. This political posturing makes it difficult to develop realistic solutions for this serious issue.
If you want to be a more informed voter, try exploring the Social Security Challenge, an online app recently released by the American Academy of Actuaries. This easy-to-understand, engaging app explains the relevant issues around closing Social Security’s funding gap. It invites you to walk virtually in fictional Townsville, where you can learn more about the issues and possible solutions, and hear the views of ordinary people. Then you can try your hand at closing Social Security’s funding gap yourself.
Potential tax increases
The Social Security Challenge app summarizes these possible ways to increase taxes to help close the funding gap:
- Increase the payroll tax rate, currently set at 6.2% of pay up to the benefits and contributions tax base, which would impact all workers covered by Social Security.
- Increase the benefits and contributions tax base, currently set at $160,200 for 2023, which would impact workers currently earning over the payroll tax base.
- Tax medical premiums paid by employees and employers as covered earnings, which would impact all workers covered by Social Security who are participating in employer-sponsored health care plans.
- Apply a 6.2% tax on investment income, which would impact people with substantial investment income.
The Challenge also offered a few variations for the first two methods listed above.
Potential benefits reductions
The Social Security Challenge app summarizes the following possible ways we could reduce future benefits to help close the funding gap:
- Change the cost-of-living adjustment (COLA) that increases benefits currently received by retirees and beneficiaries.
- Increase the normal retirement age, currently age 67 for people born in 1960 and after.
- Reduce survivors’ benefits.
- Reduce benefits for future retirees.
- Require 40 years, instead of 35 years, of participation in the system to earn full benefits.
The app also offered a few variations for each of the above methods of reducing benefits. It also offered a few possible benefit improvements for low-income beneficiaries and help for working parents by allowing five years taking care of children under age 6 instead of working to count as covered earnings.
One possible solutions
I took the Social Security Challenge app for a spin and selected a combination of tax increases, benefit reductions, and benefit increases, as follows:
- Eliminated the benefits and contribution tax base and count all earnings for calculating benefits. This reduced the estimated funding gap by 58%.
- Gradually raised the normal retirement age from age 67 to age 69 and increased the early retirement age from age 62 to age 64. This reduced the estimated funding gap by 25%.
- Reduced benefits for higher-earner retirees in 2030 and after. This reduced the estimated funding gap by 23%.
- Added the benefit improvements for low-income retirees and help for working parents. This increased the funding gap by 7%.
This combination of benefit reductions, benefit improvements, and tax increases reduced the funding gap by 99%—close enough in my opinion. Of course, there are many other combinations of tax increases and benefit reductions that could help close the funding gap. Try it out for yourself!
As you can see, there’s no easy solution to closing Social Security’s funding gap; it involves making difficult choices. And it’s counterproductive to engage in wishful thinking—the problems won’t go away. Let’s encourage our political leaders to set aside their partisan differences and get started on the hard work that’s needed to secure our future.