Personal Finance

3 Ways to Preserve Social Security Without Tax Increases

Social Security cards with money.

Social Security has been a battlefield among policymakers over the past year. Some have argued for enhanced benefits by imposing higher taxes to fund the program, such as boosting the amount of wages on which Social Security payroll taxes are collected or hiking the rate of that payroll tax. Others have argued that higher taxes aren't the answer and have instead focused on other ways to control Social Security expenditures.

Regardless of your views, control of Congress and the White House is now in the hands of those who have argued against tax increases. Here are some of the ways that Social Security can resolve its impending financial crisis without resorting to higher taxes.

Social Security cards with money.

Image source: Getty Images.

1. Reduce cost of living increases

The most painless way to pull Social Security expenditures back in line with the program's tax revenue is to make gradual changes that add up over time to big savings. That's the goal of various proposals to slow the rate of growth in Social Security benefits, most of which hinge on changing the methodology that the Social Security Administration uses to make annual cost of living adjustments.

Under current law, the SSA uses the Consumer Price Index for Urban Wage Earners and Clerical Workers to calculate its annual adjustments. But some believe that an alternative measure of information called chained CPI would be a more accurate way to measure changes in the actual cost of living. Using chained CPI would close about a fifth of the current funding gap that Social Security faces, according to figures from the nonpartisan Committee for a Responsible Federal Budget.

More explicit reductions in cost-of-living adjustments would have an even bigger impact. For instance, if the SSA were to reduce its annual adjustments by a single percentage point, it would take care of more than three-fifths of the funding shortfall all by itself. The net result would be a substantial decrease in benefits over time, but the pain would be gradual and therefore not as obvious as a one-time benefit cut.

2. Raise the full retirement age

Another way to preserve Social Security's financial viability is to raise the age at which one can collect full retirement benefits under the program. Some proposals would boost the minimum age at which one can get reduced benefits above its current 62-year-old threshold, while others would leave that number alone and focus solely on full retirement age. One popular measure would raise the full retirement age gradually to 69, with future increases tied to changes in life expectancy.

Raising the full retirement age has the effect of reducing benefits for those claiming at any age. For instance, for those born in 1960 or later, the current full retirement age of 67 means that those who take benefits at age 62 get only 70% of their full retirement benefits. If the full retirement age rises to 69, then the age 62 benefit would drop to 60% of full retirement benefits. Similar reductions would occur regardless of when one claimed Social Security. The measure is an elegant way to hide a benefit cut, but an increase to age 69 could closed about 40% of the program's shortfall.

3. Use means-testing in controlling benefit growth

Finally, some policymakers believe that specifically making higher-income Americans shoulder some of the burden of Social Security's financial challenges is appropriate. In particular, several proposals have pointed to changing benefit formulas to give top earners less of a bump in their benefits for incremental increases in their pay.

The Social Security benefit formula is complicated, but the general idea behind the reform proposal would be to change the way the formula accounts for those in upper-income tiers. By targeting changes to the upper half of income earners, Social Security could close more than a third of the gap in its financial picture going forward.

Most policymakers agree that something should be done to preserve Social Security for the future, but there's a lot of disagreement about how to go about it. For those who resolutely oppose tax increases, these three ideas are among the most popular proposals to try to keep Social Security intact.

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