The 2020 Social Security Trustees' report was just released, and it gives us a close look at the program's financial condition and where it could be heading in the future. To put it mildly, the future doesn't look bright.
The good news is that we still have quite a bit of time before Social Security would be unable to pay its promised benefits, and the program can be fixed. The more quickly Congress acts, the easier the fix will be on Americans' wallets. With that in mind, here's where Social Security stands today, how much more you would need to pay in taxes to fix the program for the long run, and what other ways Congress could potentially address the problem.
Where Social Security stands
First, the good news. Social Security ran a $11 billion surplus in 2020, and its trust funds now have about $2.91 trillion in them. Between payroll taxes, interest on its reserves, and taxation of higher-earning retirees' benefits, Social Security took in $1.118 trillion and the total cost of the program was $1.107 trillion.
Unfortunately, that's where the good news ends. The program is expected to run a deficit in 2021 for the first time in nearly 40 years, and these deficits are expected to persist (and get larger) in subsequent years. If nothing is done to change the program's direction, the reserves in the trust funds will be depleted by 2034, after which point Social Security's income will be able to pay only 78% of promised benefits.
Here's the tax increase that would fix Social Security for 75 years
As mentioned, there is still time to right the ship. Over the next 75 years, the report projects that Social Security's actuarial deficit will be equal to 3.54% of taxable payroll.
Currently, Social Security is taxed at a rate of 6.2% each for employers and employees, up to a maximum of $142,800 in wages for 2021. This makes the total Social Security tax rate 12.4%, so adding 3.54% would give us a new rate of 15.94%, or 7.97% each for employers and employees.
Here's what that means. Let's say you earn $75,000 per year. Your share of Social Security tax is currently $4,650. If the Social Security tax rate were raised to the level that would make the program sustainable for the long run, your Social Security tax would increase to about $5,978 -- an increase of more than $1,300. That's a pretty hefty tax increase.
Other ways to go
To be clear, there are several other ways Congress could choose to fix Social Security, and an across-the-board tax increase isn't the most likely option. Just to name a few, here are some of the ways Congress could increase revenue or decrease expenses from the program:
- Raise or eliminate the wage cap. For 2021, only the first $142,800 in earned income is subject to Social Security tax. One potential solution is to increase or even eliminate the wage cap to increase the amount of income subject to Social Security tax. In 1977, Social Security tax applied to 90% of earnings in the U.S. but has fallen to just over 80% now.
- Create a two-tiered tax structure. A similar option would be to leave the current wage cap in place, but also charge Social Security tax on any income above a certain threshold as well -- say, $250,000 or $400,000.
- Reduce benefits for high earners. One change that has been proposed would be to reduce the benefits paid to the highest-earnings retirees. As one example, in the current Social Security benefit formula, the multiplier applied to the highest income is 15%, and one proposal would reduce this figure to just 5%, effectively cutting benefits for people who earned the most throughout their careers while leaving the benefits of lower- and middle-income Americans untouched.
- Raise the full retirement age. When Social Security was started in 1935, the average U.S. life expectancy was about 61, and the full Social Security retirement age was 65. Now, the average life expectancy is about 79, and the full retirement age has only increased to 67. While this isn't the only reason Social Security is facing a deficit, it's certainly the biggest one.
While nobody has a crystal ball that can predict the future, the most likely solution to be implemented is a combination of things. Democrats tend to favor the tax-increase route, but most think the wage base needs to be raised. Republicans also recognize the importance of saving Social Security, but many favor the revenue-reduction approach to tax increases. So a true bipartisan solution would probably involve some combination of fixes.
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