Personal Finance

The No-Nonsense Way to Save Social Security

Older Couple Worried While Looking At Bills Paperwork Getty
Older Couple Worried While Looking At Bills Paperwork Getty

This may not come as a surprise to seniors, pre-retirees, or even much of the current labor force, but Social Security, the program designed to provide a solid financial foundation for retired workers, is in trouble.

Image source: Getty Images.

Social Security's downward spiral

At the heart of the program's woes is a rapidly growing beneficiary base with an average of moer than 10,000 baby boomers retiring per day. There simply aren't enough new workers entering the labor force and not enough payroll tax revenue being generated from those workers to offset the increase in expected payouts to baby boomers.

Additionally, life expectancies have been rising at a fairly steady rate over the past 50 years. In five decades, the average life expectancy has risen by nine years, allowing many Social Security recipients to collect benefits for a decade or longer.

Together, these demographic shifts have played a big role in the Social Security Board of Trustees estimating that the program would completely exhaust its spare cash, which stands at more than $2.8 trillion at the moment, by the year 2034. When this extra cash is gone, Social Security essentially becomes a budget-neutral program that would pay out benefits based on what it receives in payroll tax revenue and from the taxation of benefits. Interest income would no longer be a contributor with the spare cash depleted.

According to the Trustees report, exhaustion of the Trust's spare cash would necessitate a 21% across-the-board cut in benefits to sustain the program through 2090. With so many seniors reliant on Social Security to supply at least half of their monthly income, a 21% cut in benefits may be a pill that's too tough to swallow.

Social Security Card Benefit Fra Cola Retirement Facts Figures Getty

On the bright side, there are Social Security could be fixed.

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There are more than a dozen ways to fix Social Security

On the bright side, there are well over a dozen ways Social Security could be fixed.

Earlier this month, Sam Johnson (R-Texas), the chairman of the Ways and Means Social Security subcommittee, touched on a number of those solutions by introducing the Social Security Reform Act of 2016. Among the roughly half-dozen proposals offered to "save Social Security," it's the call to raise the retirement age that's among the most popular. Since people are living longer than they were decades ago, raising the full retirement age -- the age at which Social Security beneficiaries become entitled to 100% of their benefits - would presumably take increasing life expectancies into account and encourage seniors to work longer and delay taking benefits early.

Another proposal, which is even more popular than raising the retirement age, was trumpeted by Democratic presidential hopeful Hillary Clinton during her campaign -- namely, raising the payroll tax earnings cap on Social Security. In 2016, earned income between $1 and $118,500 is subject to the 12.4% payroll tax (in 2017, the upper end of the range increases to $127,200), while any earned income beyond $118,500 is free and clear of the payroll tax, giving the wealthy a nice advantage. The reason raising the payroll tax cap has so much support is because so few Americans (around one in 10) earn more than $118,500 in a year, meaning lifting or removing the cap entirely would only affect a small percentage of the population.

Other proposals that have gained steam in select circles include changing how Social Security accounts for inflation by switching to the Consumer Price Index for the Elderly (CPI-E), means-testing for benefits in order to exclude well-to-do persons who may not need Social Security income, freezing the purchasing power of benefits for upper-income earners, and even privatizing a portion of Social Security so consumers would have the option of investing some of their retirement benefits as they see fit.

But these "fixes" all have one factor in common: They dance around the easiest, no-nonsense solution available to lawmakers.


Buried within the Social Security Board of Trustees annual report is a critical estimate that could save Social Security: the actuarial deficit.

Image source: Getty Images.

This is the no-nonsense way Social Security can be saved

In 2016, based on the estimates of the Trustees, the actuarial deficit stood at 2.66% over the next 75 years. In easy-to-understand terms, a 2.66% increase to the payroll tax instituted in 2016 should be enough, based on the estimates of the Trustees, to keep Social Security payouts on their current trajectory without a reduction.

Now here's the interesting thing about payroll taxes: You and your employer split them down the middle (6.2% each). This would mean an increase of 2.66% to 15.06% (from 12.4%) would only increase your percentage of payroll tax liability by 1.33%. The self-employed would unfortunately be stuck paying the full increase should a 2.66% payroll tax increase be enacted. With median household income coming in at $53,657 per the U.S. Census Bureau in 2014, an extra 1.33% works out to less than $14 extra in payroll taxes per week.

Could you afford to hand over a few extra dollars to the Social Security Administration? Interestingly enough, many of your fellow Americans would be willing to do so if it meant saving Social Security and protecting its current payout level. In 2013, the National Academy of Social Insurance questioned the public about Social Security and found that 77% of respondents are willing to accept higher payroll taxes as a result of securing Social Security for future generations. A slightly higher number (83%) of respondents favored higher payroll taxes on the wealthy.

Yet, the Board of Trustees is also clear in its findings that the longer Capitol Hill waits to implement a payroll tax increase, the higher that increase will need to be to cover the expected budgetary shortfall between now and 2090.

A no-nonsense way to fix Social Security is right under lawmakers' noses, and the public supports it . Yet, here we stand marching headlong toward Social Security's ever-closer cash depletion date in 2034.

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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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