Connect with us

There are several options to keep Social Security from running out.

There are several options to keep Social Security from running out.


There are several options to keep Social Security from running out.


The 2019 Social Security Trustees report was recently released, and we got an updated look at the financial condition of Social Security as well as the latest projections for the future of the program.

As you might expect, the prognosis is not good. Although the report was generally a bit better than last year’s, Social Security is still projected to run out of money in 2035. If this happens, a 20% across-the-board cut would be required for all current and future Social Security beneficiaries.

Obviously, nobody wants that to happen. However, getting Congress to agree on a solution to the problem is easier said than done. There are several different ways to tackle the problem, and not surprisingly, some are more popular with Democrats while others are more widely preferred by Republicans.

Having said that, one of the most easily quantifiable ways to solve Social Security would be an increase in the Social Security payroll tax rate. Currently, American workers and their employers each pay 6.2% of compensation, up to an annual maximum ($132,900 in 2019). Self-employed workers pay both sides of the tax – employer and employee – for a total rate of 12.4% of income, up to the same maximum that applies to employees.

So, let’s take a look at how much we’d need to raise the Social Security payroll tax in order to fix the program once and for all, as well as some alternative solutions that could be considered.

How much of a tax increase would it take?

The short answer is that it depends if we decide to increase payroll taxes now or later. Keep in mind that Social Security gets income from three main sources: payroll taxes collected from American workers and their employers, interest income on reserves, and taxation of Social Security benefits paid out to retirees with certain income levels.

With that in mind, the Social Security Trustees estimates that in order to keep the program solvent for at least the next 75 years (the extent of the projection period), an immediate 2.70% increase in the Social Security payroll tax is needed. This would bring the total rate to 15.1%, up to the annual wage cap, or 7.55% each for employees and employers.

Filing for benefits: It shouldn’t matter when you file for Social Security, but in reality, it does

Living on easy street: 20 strategies to help you retire wealthy


However, keep in mind that this makes certain assumptions. It assumes that the increase would be implemented immediately, as opposed to phased in over a period of years as many proposals have suggested. It also assumes that we’re starting with about $2.9 trillion in reserves, which is currently the case. Remember that these reserves generate interest income for the program, and it’s not an insignificant amount. In 2018, $83.3 billion of Social Security’s income came from interest on the reserves. If we wait to implement a fix until these reserves are depleted, we would need a steeper tax hike to compensate for the lost interest income.

Over the long run, it’s estimated that the costs of Social Security will exceed income by as much as 4.11% of taxable payroll if no changes are made. So, if we wait until the reserves run out before we fix the problem, we’d need a payroll tax increase of more than 4% or 2% each for employees and employers. That’s a big difference and illustrates the need to act sooner rather than later to fix the problem.

Other ways to fix the problem

To be perfectly clear, there are additional ways to fix Social Security other than an immediate increase to the payroll tax. I already mentioned a gradual phase-in of a payroll tax increase (say, by 0.1% per year until the desired level is reached). In addition, some of the possible ways we could fix Social Security include, but are not necessarily limited to:

  • Increasing or even eliminating the maximum taxable wage cap. In other words, make more of high earners’ income subject to Social Security taxes.
  • Raise the full Social Security retirement age, which is currently set at 67 for Americans born in 1960 or later.
  • Reduce benefits for high-income retirees.
  • Change the way cost-of-living adjustments (COLAs) are calculated to an index that rises more slowly.
  • Some combination of the methods discussed here.

The sooner, the better

While a payroll tax increase is an example I’ve illustrated here, the most likely way Social Security will ultimately be fixed is by some combination of reforms. Even so, the point is that any of these fixes will be easier to swallow if they are implemented sooner rather than later. Social Security currently has almost $3 trillion in reserves and 16 years until it runs out of money, not to mention a projected surplus in 2019. It would be a smart idea to take advantage of this cushion while it’s there.


The Motley Fool has a disclosure policy.

The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

Offer from the Motley Fool: 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.


Source link

Continue Reading
You may also like...
Click to comment

Leave a Reply

Your email address will not be published.


To Top
error: Content is protected !!