Skip to main content

You are here

Advertisement

7 Ideas to Save Social Security

Government Affairs

The Congressional Budget Office (CBO) says the Social Security Trust Fund is in danger of running dry. That is, unless something is done to forestall that – and the CBO has come up with some ideas to do that.

In “How Changing Social Security Could Affect Beneficiaries and the System's Finances,” the CBO says that based on “The 2018 Long-Term Budget Outlook,” a CBO report concerning the federal budget and debt, if current law is not changed, the Social Security Trust Fund will run out of money in 2031. The effects, the CBO says, would be immediate – in the following year, benefits paid out would be cut by 26%.

The CBO makes seven suggestions regarding steps that can be taken to address the situation.

Show Results with Scheduled or Payable Benefits

Scheduled benefits are calculated under current law, regardless of what is available in the trust funds; payable benefits are calculated under current law, reduced as necessary to conform to the limits imposed by the trust funds’ balance. When the former is chosen, the baseline values shown in the figures reflect scheduled benefits, the latter, payable benefits. In its analysis, the CBO assumed that benefits paid to existing and new beneficiaries would be reduced by the percentage necessary to make Social Security’s total annual outlays equal its total available revenues once the combined trust funds were exhausted.

Make the Benefit Structure More Progressive

The amount of the Social Security benefit paid to a disabled worker or to a retired worker who claims benefits at the full retirement age is called the primary insurance amount (PIA). The Social Security Administration calculates that amount using a formula applied to a worker’s average indexed monthly earnings (AIME), a measure of average taxable earnings over that worker’s lifetime. The benefit formula is progressive, meaning that the benefit is larger as a share of lifetime earnings for someone with a lower AIME than it is for a person with a higher AIME.

To compute a worker’s PIA, the SSA separates that worker’s AIME into three brackets by using two bend points (or dollar threshold amounts). In calendar year 2018, the first bend point was $895, and the second $5,397. Average indexed earnings in each of the three brackets are multiplied by three corresponding factors to determine the PIA: 90% for the earnings in the lowest bracket, 32% for earnings in the middle bracket, and 15% for earnings in the highest bracket. (Bend points rise each year with average wages, whereas the factors remain constant.)

For example, for 2018, a worker with an AIME of $6,000 would have a PIA of $2,337 because the 90% factor would apply to the first $895, the 32% factor would apply to the next $4,502 ($5,397 minus $895), and the 15% factor would apply to the remaining $603 ($6,000 minus $5,397).

The CBO suggests that two options would make the Social Security benefit structure more progressive by cutting benefits for people with higher average earnings while either preserving or expanding benefits for people with lower earnings:

  1. 90/32/5 PIA factors, which would affect only beneficiaries with an AIME above the second bend point. That approach would reduce the 15% PIA factor by 1 percentage point per year until it reached 5%.
  2. 100/25/5 PIA factors, which would reduce benefits for a larger fraction of beneficiaries with higher lifetime earnings while increasing benefits for people with lower lifetime earnings. It would lower the 32% and 15% factors, and increase the 90% factor. The factors would change gradually over 10 years until they reached 5%, 25%, and 100%, respectively. (The 15% and 90% factors would change by 1 percentage point per year, while the 32% factor would change by 0.7 percentage points per year.)

Raise the Full Retirement Age

The age at which workers become eligible for full retirement benefits from Social Security – the full retirement age (FRA), also called the normal retirement age – depends on the year they were born. An increase in the FRA would reduce lifetime benefits for every affected Social Security recipient, regardless of the age at which he or she claims benefits. Workers could maintain the same monthly benefit by claiming benefits at a later age, but then they would receive benefits for fewer years.

Change the Measure Used to Index Benefits

Cost-of-living adjustments for Social Security and many other parameters of federal programs are indexed to increases in traditional measures of the consumer price index (CPI), which measures overall inflation and is calculated by the Bureau of Labor Statistics. But the BLS also computes another measure of inflation – the “chained CPI” – that accounts for changes in spending patterns and eliminates several statistical biases present in the traditional CPI.

Specify the Start Date for Benefit Options

Many proposals to change Social Security protect initial benefits for workers who are age 55 or older because those workers would have less time than younger workers to adjust their plans for working or saving. Delaying the start date for benefit options would not affect tax options, which would apply to earnings people received after the start of 2019.

Increase the Payroll Tax Rate

Social Security is financed primarily by payroll taxes on employers, employees and the self-employed. Only earnings up to a maximum set yearly are subject to the tax. The CBO suggests increasing the Social Security payroll tax rate by 1 percentage point, split evenly between employers and employees.

Raise the Taxable Maximum

Social Security is financed primarily by payroll taxes on employers, employees, and the self-employed. Only earnings up to a maximum are subject to the tax. During most of Social Security’s history, the taxable maximum was increased only periodically, so the share of covered earnings below that maximum varied greatly. The CBO suggests two options that would increase the share of earnings subject to payroll taxes:

  1. Increase the taxable maximum so that the taxable share of earnings from jobs covered by Social Security is 90%.
  2. Apply the payroll tax to earnings over $250,000, in addition to earnings below the maximum taxable amount under current law. The taxable maximum would continue to grow with average wages, but the $250,000 threshold would not change, so the gap between the two would shrink.

Do you have your own favorite ideas for protecting the Social Security Trust Fund? Share your thoughts in the comment box below!

All comments
Robert Bostian
4 years 10 months ago
Make S-Corp pass thru income subject to FICA taxes. W-2 earnings, and self-employment income for sole proprietors and partners are subject to this tax, why should S-Corp income not be similarly taxed. I frequently see S-Corp owners with extremely low levels of W-2 income in an attempt to minimize this tax.
Ryan Lupke
4 years 10 months ago
After viewing a portion of a discussion on CSPAN about a month ago, I had the following idea: If social security benefits are "means tested" on the back end by taxing a % of social security benefits if the recipient's income exceeds a certain $ amount for that year, why can't the proceeds of these federal income taxes be transferred back to the Social Security Trust as opposed to transferred to the general fund? I understand there are some nuances with our progressive income tax rates where it may be difficult at what % the social security tax rate should be assessed (pick the lowest rung of 10% if need be) and that it takes away from tax revenue from our general fund (which would increase the budget deficit further). However, it just doesn't make sense to me that if you are taxing social security benefits due to additional income via "means testing" that the tax proceeds from the tax on the social security benefits couldn't be funneled back to the social security trust fund. Along with the logistics issues, I'm sure that I'm missing some other aspect that might legally prevent this from happening. Likewise, I don't know how much additional money this could raise each year into the social security trust fund, either.
Petros Koumantaros
4 years 10 months ago
Increase the employer portion of payroll taxes by 3%. Offer a 3% payroll tax credit to any employer which sponsors a qualified retirement plan.