Published On: Sat, Oct 13th, 2018

Here’s Why We Need a Bipartisan Social Security Fix — The Motley Fool

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Social Security is, for better or worse, our nation’s most important social program. Aside from providing a monthly benefit to more than 62 million people each month, it’s responsible for keeping an estimated 22.1 million beneficiaries above the federal poverty line, according to data from the Center on Budget and Policy Priorities. Without Social Security, we’d be facing a serious elderly poverty problem right about now.

But for as much as Social Security has done for current and previous generations of Americans, it’s also facing what could be the biggest hurdle of its 83-year existence.

Dice and casino chips lying atop Social Security cards.

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Social Security’s biggest challenge to date

Beginning this year, and continuing in each successive year, Social Security is projected to expend more than it generates in annual revenue. The last time this happened was all the way back in 1982. Although this net cash outflow will start off relatively small, it’s expected to accelerate in a big way in 2020 and beyond. By 2034, the latest Trustees report implies that all $2.89 trillion in Social Security’s asset reserves will be completely gone.

The silver lining here for seniors (and other beneficiaries, too) is that Social Security isn’t going to disappear. Though the interest income it’s been earning on its asset reserves should vanish, it’ll still be generating substantial recurring revenue from the payroll tax on earned income and the taxation of benefits. In other words, the program is in no danger of going bankrupt or being insolvent, meaning payouts will continue for many future generations of workers.

The real issue is that the depletion of Social Security’s asset reserves conclusively demonstrates the unsustainability of the existing payout schedule. The Trustees have forecast the need for an across-the-board cut to benefits of up to 21% by 2034 to sustain benefit checks without the need for any further cuts through 2092. Given that more than 3 out of 5 seniors lean on their monthly check for at least half of their income, such a scenario is downright scary.

A Democrat donkey and Republican elephant squaring off atop the American flag.

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News flash: We absolutely need a bipartisan Social Security solution

You might be wondering why Social Security hasn’t yet been fixed by Congress and put back on a path where it can succeed for current and future generations. The answer, simply, is that Republicans and Democrats can’t agree on much when it comes to the nation’s most important social program. Each party believes they have the sole solution that could erase the estimated $13.2 trillion cash shortfall in the program between 2034 and 2092, thereby leaving no incentive to find a middle-ground fix with the opposition.

But, in reality, we’re absolutely going to need bipartisan cooperation if there’s to be any chance of shoring up Social Security for current and future generations. Allow me to explain why.

Why we need an increase to the maximum taxable earnings cap

On one side of the aisle is the Democrats’ core proposal of increasing the maximum taxable earnings cap tied to earned income. In 2018, all earned income between $0.01 and $128,400 is subject to the 12.4% payroll tax (although workers employed by someone else only cover half this liability, 6.2%, with their employer covering the other half). Earned income above this level is exempt from the payroll tax, thereby allowing a small percentage of well-to-do workers to escape paying tax on a portion, or majority, of their income. The cap increases annually on par with the National Average Wage Index.

Without question, the most popular Social Security fix among the American public is raising the earnings cap, or eliminating it in its entirety. Since more than 90% of American workers are already paying into Social Security on every dollar they earn, increasing or lifting this cap would only impact a very small percentage of the population.

Two Social Security cards on top of a W2 tax form, highlighting payroll taxes paid.

Image source: Getty Images.

The reason Congress needs to lift or raise this cap is simple: The amount of earnings escaping taxation has been steadily increasing in recent decades. Back in 1983, “just” $300 billion in earned income escaped Social Security’s payroll tax. However, by 2016, $1.2 trillion in earned income was exempted. As income inequality continues to grow between the rich and poor, the amount of earnings bypassing the payroll tax should as well, leading to less revenue collection for the program. Raising or eliminating this cap would help to level the playing field on income inequality, with respect to the payroll tax, as well as generate added annual income that could support the current payout schedule through 2092. 

In short, raising the cap is a must, otherwise a growing percentage of income will keep escaping the payroll tax.

Here’s why raising the full retirement age is a must

However, the other side of the aisle has an equally important solution. Republicans have long called for an increase to the full retirement age, or the age at which a worker becomes eligible to receive their full retirement benefit, as determined by their birth year.

The full retirement age is currently set to peak at age 67 for those born in 2022 or after. Yet, between Social Security’s inception in 1935 and 2022, the full retirement age will have only increased by two years. That’s right… over nearly nine decades the full retirement benefit has moved from age 65 to age 67. The problem is that longevity has moved substantially higher over that time, with the average life expectancy rising by nine years since 1960. We’ve also witnessed far more workers reaching age 65 now than even a couple of decades ago. Social Security wasn’t designed to support retired workers for decades when it was crafted in the mid-1930s, which is leading to quite the strain on the program today.

The words, time to retire, written on a calendar and circled.

Image source: Getty Images.

By gradually increasing the full retirement age to, say, 69 or 70, it would require workers to either wait longer to receive their full benefit or to accept a steeper monthly reduction to their payout if claiming early. Either way, the lifetime benefits paid to workers would be reduced over time, thereby saving Social Security money in the long run. Keep in mind that doing so would not impact current retirees, but it’d effectively be a lifetime benefit cut for future generations of retirees if passed.

While “reducing benefits” might sound like a terrible solution, not raising the full retirement age as longevity continues to increase would lead Social Security to disaster, even with a removal of the payroll tax earnings cap. These core proposals by Democrats and Republicans are critical fixes that need to be included in a bipartisan solution. In my opinion, one without the other will be nothing more than a Band-Aid for Social Security.

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