For millions of Americans, Social Security isn't just some extra monthly income -- it's a financial foundation without which they wouldn't be able to make ends meet each month. According to data from the Social Security Administration (SSA), 61% of seniors (more than 25 million elderly retirees) receiving benefits rely on their monthly check for at least half of their income. That's not chump change by any means.
Continue Reading Below
Social Security's foundation is cracking
But this financial foundation has cracks in it the size of the Grand Canyon. The 2016 Social Security Board of Trustees report estimated that the nation's most important provider of financial security for elderly Americans is in danger of burning through its $2.85 trillion in asset reserves by 2034. This is a result of more baby boomers heading into retirement, life expectancies increasing at a fairly steady pace over multiple decades, and well-to-do individuals netting a large payment and living longer than lower-income folks.
What happens when this $2.85 trillion disappears? Assuming Congress does nothing between now and 2034, it would necessitate an estimated across-the-board cut in benefits for current and future beneficiaries of up to 21%. That's not exactly what workers planned on when paying into the system for 30, 40, or maybe even 50 years.
The silver lining here, and a rebuttal to the nearly half of all Americans who believe that Social Security won't be there for them when they retire, is that the program will indeed be paying out benefits for many future generations of American workers. As long as people keep working, the payroll tax will generate revenue that the SSA can distribute as payment to eligible beneficiaries. But, it doesn't rule out the possibility of your current or expected benefit being cut. That's where Congress needs to step in with a solution.
The depressing reason why Social Security hasn't been fixed yet
Continue Reading Below
Yet, here's what's truly depressing: Lawmakers on Capitol Hill, both Democrats and Republicans, have produced multiple bills that would completely wipe out Social Security's long-term (75-year) budgetary shortfall, but none of these bills has become law. Why, you ask? Each side has produced a proposal that works, and neither side will back down or cooperate with the other party knowing full-well that their proposal eliminates the shortfall. In other words, political hubris is getting in the way.
The real irony here is that the top proposals from the Democrats and Republicans aren't perfect, and some combination of both proposals should really be considered to strengthen Social Security for future generations.
The Democrats' approach to solving Social Security's crisis
Democrats in Washington, D.C. generally believe in a handful of common solutions to resolve Social Security's more than $11 trillion long-term cash shortfall. These include:
- Lifting the maximum taxable earnings figure, which currently sits at $127,200, such that wealthier individuals pay more into the program. Right now, all earned income beyond $127,200 is free and clear from Social Security's 12.4% payroll tax.
- Switching the cost-of-living adjustment (COLA) measure from the current Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to the Consumer Price Index for the Elderly (CPI-E). The CPI-E only factors in the expenditures of households with persons aged 62 and up, thusly it would place more inflationary emphasis on medical care and housing, which take more out of seniors' budgets than the average worker.
- Lifting benefits for lower-income seniors. In most instances, Democrats want to boost the minimum benefit received by seniors from Social Security to above the federal poverty level.
Perhaps the most popular bill from Democrats that would achieve these goals is Rep. John Larson's (D-Conn.) Social Security Act 2100. It's designed to reintroduced the payroll tax on earned income over $400,000, move COLA to the CPI-E, raise minimum annual benefits to 125% of the federal poverty level, and adjust the taxation of benefits threshold, which hasn't been adjusted since 1983.
While the Social Security Act of 2100 works to strengthen Social Security, it provides no added monthly benefits to the wealthy who'll be putting more into the program via the payroll tax. Furthermore, the CPI-E still isn't a perfect inflationary measure for seniors. For instance, it fails to include Medicare Part A costs in its calculation, and these expenses, such as long-term skilled nursing care or in-patient hospital stays and surgeries, can lead to substantive costs for the elderly.
The Republican path to fixing Social Security
The GOP has a formula for success as well. Here's a quick rundown of what most of the Republican Social Security proposals have entailed.
- Raising the full retirement age to reflect a steady increase in life expectancies over the past couple of decades. By 2022, the full retirement age, or the age at which you're entitled to 100% of your monthly benefit, will be 67 years for those born in 1960 or later. Republicans want to gradually increase this figure to between 68 and 70 year of age, coercing seniors to wait longer to collect, or to accept a larger permanent reduction in benefits if they claim early.
- Instead of the CPI-W, the Republicans prefer switching to the Chained CPI. The Chained CPI takes into account a buying habit known as "substitution." In other words, if a good or service becomes too expensive, consumers will swap it out for a lesser-priced good or service. The CPI-W doesn't account for substitution. Therefore, COLA would grow more slowly for seniors under the Chained CPI.
- Eliminating the taxation of benefits. Despite popular belief, a portion of your Social Security benefits are taxable if you earn more than $25,000 as an individual or $32,000 as a couple, annually.
Arguably the most attention-grabbing bill for the GOP is Rep. Sam Johnson's (R-Tx.) Social Security Reform Act of 2016. This bill, introduced in December, would lift the full retirement age to 69 by 2030, change the COLA measure to the Chained CPI, scale back the taxation of benefits beginning in 2045 and eliminate them by 2054, and place caps on what the spouses and children of higher-earning retired and disabled individuals could net in benefits.
Though it, too, resolves Social Security's budgetary shortfall, it would end up leaving seniors with lower COLAs amid rising housing and medical costs, and it could unnecessarily punish those seniors who have no choice but to claim benefits early at age 62.
A bipartisan proposal makes sense
Neither proposal is perfect, even though they both would resolve Social Security's long-term budget shortfall and help to shore up the program for future generations of workers. If we want to really fix Social Security, we need (dare I say it) bipartisan support.
A bill that raises payroll taxes on the wealthy while also factoring in lengthening life expectancies would be a good overall approach. Social Security was never designed to be a primary source of income for most retirees, so requiring them to work longer or wait to collect 100% of their benefits is probably a smart move for lawmakers. At the same time, having the well-to-do pay more makes sense given that most wealthier Americans won't even be reliant in any form on their Social Security income once retired.
When lawmakers can put aside their pride and compromise with one another, we may have a genuine shot at strengthening Social Security. But until that point, the future remains as depressing as ever for the program.
The $16,122 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 $16,122 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.