Social Security – 80 Years Old and It Shows

Cut benefits, increase taxes, or both?

This is not the ideal 80th birthday present for Social Security but at this point it could be very likely.

For much of its existence, Social Security has collected more than it has paid out, resulting in a large surplus of funds, which is currently valued at $2.8 trillion.

That is enough money to pay out retirement benefits as they are until 2035, but after that, Social Security would have to rely solely on the tax payroll, which is only about 79% of what is scheduled to be paid out. This means that retirement benefits would automatically be cut by at least 21%.

Disability, on the other hand, is scheduled to run out next year (2016). After that, the disability fund would have to rely solely on tax payroll which would cover 81% of the spending. In the past, congress has redirected money from retirement to disability, and that might happen again, which is what Obama and the Democratic Party are pushing for.

The Washington Post highlighted various options:

TAXES

Social Security is financed by a 12.4 percent tax on wages. Workers pay half and their employers pay the other half. The tax is applied to the first $118,500 of a worker’s wages, a level that increases each year with inflation.

Options:
—apply the payroll tax to all wages, including those above $118,500. This option would wipe out 66 percent of the shortfall.
—increase the combined payroll tax rate by 0.1 percentage point a year, until it reaches 14.4 percent in 20 years. This option would eliminate 49 percent of the shortfall.

RETIREMENT AGE

Workers qualify for full retirement benefits at age 66, a threshold that gradually rises to 67 for people born in 1960 or later. Workers are eligible for early retirement at 62, though monthly benefits are reduced.

Options:
—gradually increase the full retirement age until it reaches 68 in 2033. This option would eliminate 15 percent of the shortfall.
—raise the early retirement age to 64 in 2023, and the full retirement age to 69 in 2027. This option would wipe out 29 percent of the shortfall.

COLAs (Cost of Living Adjustment)

Each year, if consumer prices increase, Social Security benefits go up as well. By law, the increases are pegged to an inflation index. This year, benefits went up by 1.7 percent.

Options:

—adopt a new inflation index called the Chained CPI, which assumes that people change their buying habits when prices increase to reduce the impact on their pocketbooks. The Chained CPI would reduce the annual COLA by 0.3 percentage point, on average.
This option would eliminate 19 percent of the shortfall.
—adopt a new measure of inflation that takes into account the higher costs that older people have to pay for health care. This measure, called the CPI for the Elderly, would increase the annual COLA by about 0.2 percentage point, on average.
This option would increase the shortfall by 13 percent.

It’s clear something needs to happen but it isn’t clear what that something should be. At least this is an issue that congress is taking very seriously and hopefully will solve to some degree in the near future. This is a very important topic to stay up to date with, as it greatly affects all of us. like always, it’s best to stay informed.

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