Strengthening Social Security Is a Double-Edged Sword
In case you haven't heard, Social Security has a problem. Our nation's most prized social program is facing a monstrous cash shortfall over the next 75 years of almost $17 trillion, according to the 2020 report from the Social Security Board of Trustees. Though Social Security is in no danger of going bankrupt, retired workers could be staring down an up to 24% monthly benefit reduction if things don't change.
How does a social program that's been paying benefits to retired workers for more than 80 years and is sitting on $2.9 trillion in asset reserves (i.e., net cash surpluses built up since inception), go so terribly wrong? The answer lies with a host of ongoing demographic changes.
While baby boomers are often the scapegoats of Social Security's woes, the finger can also rightly be pointed at growing income inequality, historically low birth rates, reduced net legal immigration, increased longevity, and even record-low interest rates for the current dilemma.
There's little question that current and future beneficiaries need lawmakers in Washington, D.C. to get on the same page and fix Social Security. But there's just one problem: Strengthening Social Security is a double-edged sword.
Democrats and Republicans each have a workable solution to strengthen Social Security
Right now, Democrats and Republicans both have a solution that would work to make Social Security a stronger program.
Democrats favor the idea of raising or eliminating the earnings cap associated with the 12.4% payroll tax. In 2020, all earned income (wages and salary) up to $137,700 is subject to the payroll tax, with every dollar earned above $137,700 exempt. Since 94% of Americans are expected to earn less than $137,700 this year, they'll be paying into Social Security with every dollar. Comparatively, the well-to-do will escape the payroll tax on a portion, or perhaps most, of their income.
By raising or eliminating the payroll tax cap, the rich would be counted on to pay a larger share into the program, immediately boosting revenue.
Meanwhile, Republican lawmakers prefer the idea of gradually raising the full retirement age -- i.e., the age at which you become eligible for 100% of your retirement benefit, as determined by your birth year. Payouts began in 1940, but through 2022, the full retirement age has risen by only two years (from age 65 to 67). Comparatively, the average life expectancy of Americans at birth has jumped by more than 16 years since 1940.
By gradually increasing the full retirement age to 70, future generations of retirees would need to either wait longer to collect their full payout or accept a steeper monthly reduction for claiming early. Either way, it results in lower lifetime benefit outlays.
Fixing Social Security is a double-edged sword
The issue is that no matter what solution or combination of solutions is offered, some group of people will lose out. For example, the Democrats' plan would result in the wealthy paying substantially more into Social Security without receiving a commensurate increase in their own future benefits. As for the Republican plan, it would protect the payouts of existing retirees while reducing the lifetime benefit potential of millennials and Generation Z.
Since any change to the Social Security program is going to result in a group of people who are worse off than they were before, lawmakers are hesitant to risk angering voters and losing their elected seats on Capitol Hill by pursuing these changes. This has only perpetuated the stalemate at the congressional level when it comes to fixing and strengthening the program.
But the fact is, both the Democrat and Republican solutions will be needed if we're to truly improve the financial outlook for Social Security and preserve payouts for future generations of retirees.
For instance, the Democrats' proposal that would require the well-to-do to pay more into the system is very much needed. The Trustees report expects Social Security to begin expending more money than it's collecting by 2021, with these annual net cash outflows growing in size with each passing year. The core proposal from Democrats to tax higher-income workers would provide decades of added solvency to the Social Security program and an immediate boost to revenue.
But the Republican proposal to gradually raise the full retirement age would also play a key role. Due to a number of ongoing demographic changes, raising taxes alone won't protect Social Security's payout schedule forever. While the idea of "cutting benefits" may not sound appealing, increasing longevity, lower birth rates, and reduced net legal immigration are all factors that should compel lawmakers to employ this change.
A bipartisan solution is the best fix for Social Security, but not everyone is going to come out ahead.
The $16,728 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.