FUNDING SOCIAL SECURITY

ABSTRACT: Advocates for cutting Social Security benefits claim that cuts are needed because of a future funding shortfall. However, Social Security’s projected shortfall is small and 20 years in the future. Moreover, there are adjustments to the funding for Social Security that will easily eliminate the future funding shortfall.

The two most frequently mentioned ways of cutting Social Security’s costs are reducing future benefit payments and increasing the retirement age. The leading proposal would cut benefits by reducing the annual cost of living increases that seniors receive. However, to most accurately reflect the change in the cost of living that seniors actually experience, the annual increase in benefits should be greater than it is currently, not less. Cutting benefits will hurt retirees who rely on their modest Social Security benefits to make ends meet.

Another way to reduce Social Security’s cost is by increasing the age for receiving Social Security. The age for collecting full Social Security benefits is being increased from 65 to 67. People are living longer on average, but those with low incomes and less education have seen very little change in their life expectancy. Therefore, it hardly seems fair to increase the Social Security retirement age further.

The simplest and probably fairest way to address the Social Security shortfall would be to eliminate or increase the cap on the earnings that are subject to the Social Security tax. If the cap were eliminated, Social Security’s shortfall would be solved for at least 75 years.

FULL POST: Advocates for cutting Social Security benefits claim that cuts are needed because of a future funding shortfall. However, Social Security’s projected shortfall is small and 20 years in the future. It has no impact on the federal deficit because Social Security has its own, dedicated funding stream. So cutting benefits will do nothing to reduce the deficit but would hurt retirees who rely on their modest Social Security benefits to make ends meet. (See my post The Retirement Crisis and Social Security of 11/26/13 for more information. https://lippittpolicyandpolitics.org/2013/11/26/the-retirement-crisis-and-social-security/) Moreover, there are adjustments to the funding for Social Security that will easily eliminate the future funding shortfall.

The two most frequently mentioned ways of cutting Social Security’s costs are reducing future benefit payments and increasing the retirement age. The Republican budget and President Obama and some Democrats have proposed that benefits be cut by reducing the annual cost of living increases that seniors receive. This would be accomplished by using a different and lower measure of the Consumer Price Index (CPI) to calculate the annual adjustment in benefits – the “Chained CPI” instead of the regular CPI. (See my post Social Security and Chained CPI of 4/13/13 for more information. https://lippittpolicyandpolitics.org/2013/04/13/social-security-and-chained-cpi/)

However, the most accurate measure of the change in the cost of living for seniors is the CPI-E (for Elderly), and it is typically higher than either of the regular CPI (which is currently used) or the proposed “Chained CPI”. This means that to most accurately reflect the change in the cost of living that seniors actually experience, the annual increase in benefits should be greater than it is currently, not less. The bills in Congress to strengthen Social Security generally include the use of CPI-E for the annual cost of living adjustment. [1]

Another way to reduce Social Security’s cost is by increasing the age for receiving Social Security. The age for collecting full Social Security benefits is being increased from 65 to 67. (One can get Social Security benefits at younger ages but the amount received is reduced.) The major argument for this is that people are living longer on average. They are, but it is the well educated and affluent who are living longer. Those with low incomes and less education have seen very little change in their life expectancy and those with the least education have seen their life expectancy decline. [2] Therefore, it hardly seems fair to increase the Social Security retirement age further.

The simplest and probably fairest way to address the Social Security shortfall that’s 20 years in the future would be to eliminate or increase the cap on the earnings that are subject to the Social Security tax. (This Social Security tax is the dedicated and sole funding source for Social Security.)

Currently, Social Security tax is only paid on the first $113,700 of earnings. Amounts above that are untaxed. For workers earning up to that amount, they pay a 6.2% tax that is deducted from their paychecks and their employers match that amount. But because of the cap, someone making $1 million only pays tax on $113,700 of earnings, meaning that overall they pay less than 1% (instead of 6.2%) of their earnings into Social Security. If the cap were eliminated, Social Security’s shortfall would be solved for at least 75 years.

The bills in Congress to strengthen Social Security generally solve the funding shortfall by increasing the funding from the Social Security tax. Some raise or eliminate the cap on earnings subject to the tax. Others apply the tax to earnings over $250,000 but not to earnings between the current cap and $250,000 to avoid increasing taxes on people in that upper middle class earning range. It seems fairer and simpler to me to eliminate the cap and cut the tax rate slightly. This would give a small tax cut to everyone earning less than the $113,700 cap.

There are other ways to increase Social Security funding. One that has been suggested is to increase income taxes on high income individuals getting Social Security benefits and putting this revenue back into Social Security. Another is to use some of the revenue from the estate tax to fund Social Security. There are other options, but raising or eliminating the cap on earnings subject to the Social Security tax is the simplest and most straight forward solution to Social Security’s long-term funding shortfall. (See my post Social Security: Facts and Fixes of 12/4/11 for more information. https://lippittpolicyandpolitics.org/2011/12/04/social-security-facts-and-fixes/)