This Surefire Way to Fix Social Security Isn't Too Popular

By Markets Fool.com


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According to the Social Security Administration's December 2015 Fact Sheet, among elderly Social Security beneficiaries, 48% of married couples and 71% of unmarried persons get at least half of their monthly income from Social Security. Put plainly, Social Security is extremely important to the financial well-being of our nation's retired workers.

However, that well-being is in jeopardy. The Old-Age, Survivors and Disability Insurance Trust (OASDI) -- which is what pays out benefits to more than 60 million eligible people each month -- is slated to burn through its $2.8 trillion in spare cash by the year 2034. The deterioration in the OASDI can largely be traced to the growing number of baby boomers who are retiring from the workforce, as well Americans' rising life expectancies. In 1940, the life expectancy of a 65-year-old was 14 years; It's now 20 years. The program simply couldn't predict these demographic changes, and now it's on the precipice of an immense financial strain.

Based on the report, if Congress does nothing and allows its spare cash to run out, then a steep benefit cut of up to 21% may be needed to keep the program on solid footing through 2090. Of course, the idea of cutting benefits doesn't sit well with current retirees or the countless millions of Americans who could be reliant on Social Security income when they retire.

The great debate is over what lawmakers should do to fix Social Security.


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This is a surefire way to fix Social Security

The Social Security Board of Trustees did offer up an idea in its report on how to fix the budgetary shortfall -- and, on paper, it's a great idea. The suggestion would completely eliminate the need to cut benefits through the year 2090, according tothe authors' calculations. However, the plan itself is far from popular.

The Trustees' report examined the long-range differences between the projected payroll tax revenue flowing in and the expected payouts that will be made to a growing senior population. The findings show a shortfall in the OASI (Old-Age and Survivors Insurance Trust) of 2.39% and a DI (Disability Insurance Trust) shortfall of0.26% as of 2015. That's a total deficit of 2.66%, after some integer-rounding by the Board.

In simple terms, the Board is recommending that payroll taxes be increased by 2.66%for all workers across the board. Doing so should eliminate the need for benefit cuts through 2090, thereby lifting a large burden off the shoulders of seniors and baby boomers who haven't saved much for retirement. The longer this across-the-board increase is pushed down the road, the higher it will need to be in order to maintain benefits at their current levels.

Currently, the SSA collects a 12.4% payroll tax on workers' earnings up to $118,500, while income above that threshold is exempt. You and your employer split this tax down the middle, with your employer paying 6.2% while you cover the other 6.2%. Self-employed persons are responsible for all 12.4%. Also note that the $118,500 cap on taxable income is typically adjusted each year to keep up with inflation.

The Board's suggestion would add 2.66% in payroll taxes, meaning 15.06% would be collected on earnings up to $118,500. This would bump self-employed payroll taxes up to 15.06% and increase the employer-employee shares to 7.53% each.


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Americans would prefer this idea

However, Americans aren't exactly happy with the idea of an across-the-board payroll tax increase, even if it would bridge 100% of the budgetary shortfall.

In aninformal survey conducted by The Washington Post in 2014 that offered up one dozen ways to fix Social Security, online readers were allowed to choose as many methods as they felt they could stand behind. Increasing taxes on all workers was the fifth-most popular option of 12, but it received only 30% support from readers. While it's clear there are plenty of less desirable choices out there -- doing nothing and passing these problems along to the next generation finished last, with just 2% of the vote -- raising taxes is nowhere near Americans' top option.

Of the more than 6,100 responses received, the clear solution that the American public would like to see is raising the payroll tax cap on earnings for wealthier individuals. Some 69% of online readers selected this option. The next-closest option, raising the retirement age, was well behind, with 44% support.

As noted above, the payroll tax on Social Security applies to all earnings up to $118,500. Any income earned beyond this amount is free and clear of the SSA's payroll tax. In other words, nearly nine in 10 working Americans are paying this tax on every cent they earn throughout the year, while the richest Americans are only subject to the payroll tax on a small percentage of their income. Americans view this as unfair and would prefer that the rich be responsible for the payroll tax on earnings above the current cap. Because this measure would only affect a small and thriving segment of the population, it has received a lot of support.


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There are problems with the "tax the rich" strategy

However, there are two substantial concerns with lifting the payroll tax cap on earnings. First, requiring the wealthy to pay more into the program without giving them a commensurate boost in their retirement benefits may not be fair. Social Security has a monthly benefit cap, so Americans who earn more than $118,500 would get nothing in return for their increased payroll taxes. Naturally, this doesn't sit so well with the nation's well-to-do individuals.

The bigger problem is that simply having the rich pay more doesn't necessarily resolve the Social Security shortfall. The Center for Retirement Research at Boston College, which collaborated with The Washington Post to poll its online readers, notes that taxing high-income earners only closes about 30% of the budget shortfall. This could help the Social Security trusts funds last for years or even decades beyond 2034, but it's not a solution that would keep the program solvent at its current benefit level through the year 2090.

What's evident from the online reader poll is that many of the options receiving substantial support don't come close to resolving the budgetary shortfall that threatens to slash beneficiaries' monthly payouts.

Though I won't even attempt to predict what Congress will do with regard to Social Security, it's looking more and more likely that the program will need some middle-ground combination of tax increases and benefit cuts. The 60 million Americans who are currently receiving a Social Security benefit -- and the roughly 75 million baby boomers out there who recently retired or are preparing to do so within the next decade or so -- will want to pay close attention to how lawmakers tackle this problem, as the solution will almost certainly affect their Social Security income.

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Sean Williamshas 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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