Social Security is a hot topic in the news today. Many are publicly asking: will the system still be here for future generations? While there is a lot that can be done to strengthen the solvency of Social Security, the truth is that it’s not going broke and there are plenty of reasons to maintain it as a strong and sound social insurance program. In fact according to the most recent Trustees Report there was an annual surplus of $69 billion in 2010.
So here’s the big question: What exactly is the Social Security shortfall and how urgent is the need to fix the system? Key demographic changes do put a more immediate strain on Social Security’s financing:
- The large boomer generation is beginning to retire, so more people will be collecting benefits. People are not only living longer and collecting benefits for longer periods. For these reasons, Social Security faces a shortfall in about 2036.
- Without any change, Social Security would only have enough revenue to pay about 75-78% of promised benefits in 2036. The short-fall is about 22-25%.
- So the system is not “totally broke” or “running out of money”. When people say the system is “totally broke” they are incorrect.
- However, many agree that although there is no immediate crisis, the longer we delay putting the program into long-term financial balance, the more drastic the changes that will have to be made in the future.
Current reform proposal options run the gamut from simply tweaking proposals to change revenues and benefits to more dramatic changes of partially privatizing the system into individually invested private accounts.
The National Commission on Fiscal Responsibility and Reform plan calls for:
- changing the benefit formula to slow the growth of benefits for many workers,
- an increase in the retirement age to 68 by 2050,
- an increase in the payroll tax on upper income Americans,
- a cut in the annual cost of living increases for Social Security benefits,
- a resulting reduction in the monthly benefits for most beneficiaries, and
- a requirement that newly hired state and local government employees be required to pay Social Security taxes.
There are others who support a mix of options including tax increases and benefit cuts to put the system on sounder financial footing.
- Social Security payroll taxes apply to a worker’s earnings only up to a cap—$106,800 in 2011. Others suggest raising the cap so that the payroll tax is applied to 90% of all earnings as was intended when the program was started.
- Another option is to raise the payroll tax on everyone. A tax increase of about 1% on employees and 1% on employers would eliminate the shortfall.
- Partial privatization would allow workers to divert a portion of the current payroll taxes into accounts invested in the stock market. The guaranteed benefit under Social Security would be reduced and workers would rely on their accounts to make up the difference.
- Extend coverage to new workers in state plans.
- “The 2010 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds.” The Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Referred to the Committee on Ways and Means. 9 August 2010. <http://www.ssa.gov/OACT/TR/2010/tr2010.pdf>.