Recently, the Social Security Board of Trustees issued a report indicating that its cash reserves are expected to run out by 2033. When that happens, the program will only be able to pay 77% of projected benefits. In other words, if Congress doesn’t act quickly to close the looming Social Security deficit, the Social Security checks of millions of Americans could shrink dramatically within a decade.
Social security: whatever your age, do not claim benefits until you have reached this stage
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To prevent a Social Security crisis, policymakers and experts have come up with countless ideas in hopes of solving the problem. But with so many options on the table, what solutions would actually work?
How Social Security Funding Works
Before we dive into the solutions currently being proposed for the Social Security crisis, let’s first look at how the federal government funds Social Security. Simply put, Social Security dollars come from dedicated payroll taxes, which are paid by employers and employees (each contributing 6.2% of salary up to the taxable maximum of $160,200) and workers self-employed (contributing 12.4% of their salary). However, this system can only continue to operate when there are enough workers to pay current beneficiaries.
Why is Social Security running out of money
As mentioned above, social security funds are fed by workers who pay payroll taxes each year. But with America’s population aging, people choosing to have fewer children and more baby boomers retiring, there are fewer workers left to fund each retiree’s benefits. Without reform, the money held by social security trust funds could run out by 2035.
See: 6 Big Social Security Overhauls in 2023
Proposed Solutions to the Social Security Crisis
Without a doubt, Social Security needs to be fixed. With the current rate of depletion of Social Security funds, millions of elderly and retired people could see their benefits reduced by around 20% within a decade. To avoid depleting a Social Security trust fund, the government has two options: increase payroll taxes or reduce benefits. Of course, that’s easier said than done, but lawmakers in Washington are currently considering a few solutions to deal with the Social Security crisis.
If Congress decides to fix Social Security by cutting benefits, it can do so by:
Increase in the full retirement age. According to the Social Security Administration, you can start receiving your Social Security benefits as early as age 62. However, you will not be entitled to full benefits until you reach full retirement age, which is currently set at 67 for workers born after 1959. full retirement age at 70 and beyond, Congress hopes to make more workers ineligible for full Social Security benefits longer — slowing the rate at which the Social Security trust fund is depleted.
Lower Social Security Cost of Living Adjustments (COLAs). Since 1975, increases in Social Security benefits have been based on the rate at which the cost of living rises. These adjustments to Social Security benefit amounts are also called cost of living adjustments or COLAs. However, many argue that cost-of-living adjustments have been too generous and should be lowered to reduce costs and slow the growth of benefits.
Here’s what Congress can do if it chooses to reform Social Security by raising taxes:
Lifting of the tax ceiling. In 2023, any income above the earnings cap ($160,200) is exempt from Social Security payroll tax. By eliminating or lifting this tax cap, Congress could provide more revenue to the Social Security Trust Fund and keep it solvent longer.
Increase in social charges. Employees and employers currently each pay 6.2% of wages in taxes to fund social security. By raising this rate, Congress could pump more money into the Social Security trust fund and ensure that it remains sustainable for years to come.
Tax benefits. Benefits are additional benefits or compensation above an employee’s reported salary. And some employee benefits, such as health and life insurance, are not taxable. If Congress taxed those dollars, they could improve the solvency of the Social Security program.
Which proposed solution would actually work?
So what’s the verdict? Which of these proposed solutions to the Social Security crisis would actually work?
According to Nicholas B. Creel, a political scientist and assistant professor of business law at Georgia College & State University, Republicans often lean heavily toward the cost-cutting approach of benefit cuts, while Democrats are more inclined to consider tax increases to bolster revenues. Creel said that “ultimately we will likely have to rely on both strategies given that changes to the program will require bipartisan compromise to get it passed.”
But in Creel’s opinion, eliminating or lifting the income cap on the Social Security tax seems like the most sensible option. Currently, the tax exempts all income over $160,200, which means that every dollar earned over that amount is not subject to tax. He said, “By lifting this cap, Social Security would be able to pay promised benefits for at least another 35 years.” Moreover, this tax increase would only affect the wealthiest 6% of Americans who earn more than $160,200 and can well afford the tax increase. Creel argues that this trade-off is worth it in order to ensure that all Americans receive the benefits they have been promised.
What can you do to ensure a fully funded retirement?
While we can’t fully control what Congress will do over the next decade to fix Social Security, we do have control over our own finances. To ensure a fully funded retirement, start cutting your expenses and saving some extra money. And if you need help creating a solid retirement plan, consider working with a financial advisor who can point you in the right direction. By building a soft nest egg, you won’t have to worry about not receiving enough Social Security benefits to maintain a comfortable lifestyle in your golden years.
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This article originally appeared on GOBankingRates.com: 6 Proposed Solutions to the Social Security Crisis: Which Would Actually Work?