By Kevin Rigg, Director of Financial Life Planning, SoundView Advisors
It is projected that starting in 2035, just 80% of promised Social Security benefits will be payable if Congress doesn’t fix the program sooner. Making the program sustainable will generally mean raising taxes, cutting benefits or a combination of both.
The coming shortfall has been well known for years and many proposals have been put forth to shore up Social Security. A recent survey of voters by the University of Maryland’s Program for Public Consultation sought to assess what changes had the most public support. These are the changes to help sustain the Social Security program that had the most support amongst survey respondents:
1. Raising the Social Security payroll tax cap
In 2022, Social Security payroll taxes are applied on up to $147,000 in income, a level that is adjusted each year. Several proposals have been put forth to either increase this threshold (to $250,000) or reinstate it at higher income levels (over $400,000). These changes would have the most significant impact on sustaining the Social Security program, in some cases eliminating up to 61% of the shortfall.
2. Reducing benefits for high earners
Wealthier retirees receive more generous benefits on an absolute basis, although the percentage of benefits relative to earnings goes down as income increases. There are proposals to perform means testing that would further reduce benefits for top earners, which are estimated to eliminate the shortfall by 11%.
3. Gradually raising the retirement age
Your retirement age is when you stand to get the full benefits you earned based on your work record. Increases to the retirement age that were enacted in 1983 are still getting phased in today. For people born in 1960 or later, the full retirement age is 67. Because many people work and live longer, proposals have been made to raise the retirement age again, which could reduce an estimated 14% of the shortfall.
4. Increasing the payroll tax
Currently, employers and employees each pay a tax of 6.2% of wages, and raising those rates could have a big impact on the program’s solvency. A simulation showed that raising those rates to just 6.5% would help eliminate 16% of the shortfall.
It’s hard to predict what will happen with Social Security reform, but changes to the program are likely in the coming years, and the proposals listed above are certainly garnering more attention. We don’t anticipate significant changes to actual benefit payments in the near term, and any that are made are likely to be phased in over several years. We will continue following these issues, and you can expect further analysis and conversation from your advisory team as we learn more.
Source: https://www.cnbc.com/2022/08/03/changes-americans-are-willing-to-make-to-fix-social-security.html