You would have to have lived in a cave for the past decade not to know that Social Security will face major funding challenges in about 10 years. If Congress does not act to close the funding gap, retirees could face benefit reductions of approximately 20% to 25%.
Unsurprisingly, our political leaders can’t agree on the method they should use to close this cap. Most Democrats want to close the gap with tax increases, while many Republicans want to close the gap with benefit cuts. However, responding to pressure from President Joe Biden, House Speaker Kevin McCarthy recently promised that cuts to Social Security benefits would be off the table in the looming battle over the cap. Of the debt. This political stance makes it difficult to develop realistic solutions to this serious problem.
If you want to be a more informed voter, try exploring the Social Security Challenge, an online application recently launched by the American Academy of Actuaries. This engaging and easy-to-understand app explains relevant topics related to closing the Social Security funding gap. It invites you to virtually walk around fictional Townsville, where you can learn more about the problems and possible solutions, and hear the opinions of everyday people. Then you can try to close the Social Security funding gap yourself.
Possible tax increases
The Social Security Challenge app outlines these potential ways to raise taxes to help close the funding gap:
- Increase the payroll tax rate, currently set at 6.2% of salary up to the tax base of benefits and contributions, which would impact all workers covered by Social Security.
- Increase the benefit and contribution tax base, currently set at $160,200 by 2023, which would impact workers who currently earn above the payroll tax base.
- Taxing medical premiums paid by employees and employers as covered earnings, which would affect all Social Security-covered workers who participate in employer-sponsored health care plans.
- Apply a 6.2% tax on investment income, which would affect people with substantial investment income.
The Challenge also offered a few variations for the first two methods listed above.
Potential profit reductions
The Social Security Challenge application outlines the following possible ways we might reduce future benefits to help close the funding gap:
- Change the cost of living adjustment (COLA) that increases the benefits currently received by retirees and beneficiaries.
- Increase the normal retirement age, currently 67 for people born in 1960 and later.
- Reduce survivor benefits.
- Reduce benefits for future retirees.
- Require 40 years, rather than 35 years, of participation in the system to obtain full benefits.
The app also offered a few variations for each of the above methods to reduce the benefits. It also offered some potential benefit enhancements for low-income recipients and help for working parents by allowing five years of caring for children under age 6 instead of working to count as covered income.
One of the possible solutions
I tested the Social Security Challenge application and selected a combination of tax increases, benefit reductions, and benefit increases, as follows:
- The tax base for benefits and contributions was eliminated and all earnings are computed for the calculation of benefits. This reduced the estimated funding gap by 58%.
- It gradually raised the normal retirement age from 67 to 69 and raised the early retirement age from 62 to 64. This reduced the estimated funding gap by 25%.
- Reduced benefits for higher earning retirees in 2030 and after. This narrowed the estimated funding gap by 23%.
- Added benefit enhancements for low-income retirees and help for working parents. This increased the funding gap by 7%.
This combination of benefit reductions, benefit enhancements, and tax increases narrowed the funding gap by 99%, close enough in my opinion. Of course, there are many other combinations of tax increases and benefit reductions that could help close the funding gap. Try it yourself!
As you can see, there is no easy solution to closing the Social Security funding gap; It involves making difficult decisions. And it is counterproductive to get involved in illusions: the problems will not go away. Let’s encourage our political leaders to put aside their partisan differences and begin the hard work it takes to secure our future.
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