Price quotes are that revenues from Social Security payroll taxes will be able to payout full advantages till around 2023. Well, when individuals pay into Social Security, a portion of those profits go to advantages for present senior citizens. Present forecasts are that the trust fund will last till 2033 at which time Social Security taxes will be able to cover only 77% of guaranteed benefits.
On average Social Security advantages cover about 38% of total retired person income. About 35% of recipients rely on Social Security for 90% or more. It is evident that fixing Social Security must be a top priority in Washington although significant conversations by the Congress and the White House have not yet begun in earnest.
The Potential Solutions
Some options are focused on controlling advantages while some are focused on increasing incomes. On the revenue side:
Raise the Social Security Tax Rate: In 1937, when the program began Social Security taxes were 2% on earnings up to a certain amount. Current estimates are that if the private rate were increased slowly from 6.2% to 7.2%, we could get rid of over half of the deficiency. If the rate for both individuals and employers increased to 7.6% the whole shortfall could be eliminated.
PROS: Can deal with a significant portion of the issue and is relatively easy to carry out.
CONS: Increases taxes which are out of favor and might have a negative impact on tasks and job creation as a business are required to pay more in taxes for each staff member and thus, may be hesitant to hire.
Lift the Payroll Tax Cap: Social Security taxes are only collected on incomes up to a certain quantity. Price quotes are that if this cap were slowly removed, about 71% of the Social Security shortfall might be gotten rid of.
PROS: Can fix a large part of the financing deficit, impacting just a reasonably small portion of wage earners.
CONS: Puts the burden of correcting the Social Securities funding problem on a small number of taxpayers. This raises questions of fairness and equity. Payroll tax caps have remained in location since the very beginning of the program.
3. Means Test Social Securities Benefits: Everyone who has paid into the system and satisfies some minimum requirements qualifies for benefits. Means testing Social Security advantages needs that if your non-Social Security income goes above a particular level, Social Security advantages are either decreased or removed. Present recommendations are to reduce the advantages for people with non-Social Security income above $55,000 and eliminate them entirely when income is higher than $110,000. When I read this, I wondered whether these income levels would be inflation changed yearly. This is very important due to the fact that withdrawals from 401K and IRA cost savings are counted as income and as inflation boosts you have to draw out more from cost savings. These limitations could put an increasing variety of retired people in jeopardy each year if not changed?
PROS: Saves Social Security funds by withholding benefits from those least in requirement.
CONS: Depending on the earnings requirements applied, this might be a massive landmine for senior citizens, mainly if the earnings limits are not inflation adjusted yearly. Remember the Alternative Minimum Tax (AMT) which was meant to make the wealthy pay their fair share of taxes. Numerous in the center class has been captured since earnings criteria have not been inflation changed each year.
On the advantages side of the formula:
In the 1940’s, for people who made it to age 21 only 54% of males and 61% of females likewise made it through to the age of 65. In 2009, the survival rate had increased to 82% of the men and 89% of women. More people are living long enough to collect Social Security and as soon as they do, they gather for longer.
PROS: People are living longer and changing the age at which full advantages are readily available ought to be a small imposition. This is true especially if this is phased in and people have time to adjust their preparation.
CONS: Retiring at an older age works well for individuals in administrative and professional positions. However, for people who operate in physical requiring occupations, retirement at age 70 might be impractical.
2. Decrease Annual Adjustments for Inflation: Each year, Social Security benefits are increased by the rate of inflation. Currently, this is based on the Consumer Price Index (CPI) for city employees. One suggestion is to reduce the yearly increase by adopting exactly what is called the Chained CPI. If you desire more details on this, Google “Chained CPI.” The net is a projected yearly decrease in the inflation change of 0.25%. If the regular CPI would increase advantages by 3% for example, the chained CPI would increase it by only 2.75%. While this looks like a small modification the impact can be substantial gradually. This option might cover about 20% of the shortage.
PROS: A reasonably primary method to maintain Social Securities funding.
CONS: Some feel that the “Chained CPI” idea is flawed. The real rate of inflation for retirees is probably higher than that for metropolitan employees, the basis for present annual Social Security change. If senior citizen earnings are currently not be adjusted effectively for inflation, further lowering the yearly inflation change might produce genuine problems, particularly as it compounds gradually.
Existing projections are that the trust fund will last up until 2033 at which time Social Security taxes will be able to cover just 77% of guaranteed advantages.
On average Social Security advantages cover about 38% of overall senior citizen income. About 35% of recipients rely on Social Security for 90% or more. Raise the Social Security Tax Rate: In 1937, when the program began Social Security taxes were 2% on earnings up to a specific quantity. Way testing Social Security benefits requires that if your non-Social Securities earning go above a specific level, Social Security benefits are either minimized or eliminated.