Fixing Social Security: Achievable but Not Without Tough Choices

If Congress fails to take action to address the Social Security funding shortfall within 10 years, retirees could face benefit reductions of approximately 20% to 25%.

As expected, there is a lack of consensus among our political leaders on the approach that should be taken to address this gap. Most Democrats favor closing the gap with tax increases, while many Republicans favor closing the gap with benefit reductions. However, House Speaker Kevin McCarthy recently pledged, in response to pressure from President Joe Biden, that Social Security benefit cuts would not be considered during the impending battle over the debt limit. This political maneuvering makes it challenging to formulate realistic solutions to this significant issue.

To become a better-informed voter, consider exploring the Social Security Challenge, an online application recently launched by the American Academy of Actuaries. This accessible and engaging app clarifies the pertinent issues surrounding the funding gap in Social Security, inviting users to virtually stroll through the fictional town of Townsville, where they can gain further insight into the issues and potential solutions, as well as hear the perspectives of ordinary citizens. Users can then attempt to close the funding gap in Social Security themselves.

Possible Tax Increases The Social Security Challenge app summarizes potential approaches to increase taxes to address the funding gap as follows:

• Increase the payroll tax rate, which is presently set at 6.2% of pay up to the benefits and contributions tax base, and would affect all workers covered by Social Security.
• Raise the benefits and contributions tax base, which is currently set at $160,200 for 2023, and would impact workers who currently earn more than the payroll tax base.
• Tax medical premiums paid by employers and employees as covered earnings, which would affect all workers covered by Social Security who participate in employer-sponsored health care plans.
• Apply a 6.2% tax on investment income, which would impact individuals with significant earnings.

The challenge app also provides a few variations for the first two methods mentioned above.

The Social Security Challenge app summarizes the following possible approaches to reducing future benefits in order to address the funding gap:

• Alter the cost-of-living adjustment (COLA) that currently increases benefits received by retirees and beneficiaries.
• Increase the normal retirement age, which is currently set at 67 for individuals born in 1960 or later.
• Reduce survivor benefits.
• Decrease benefits for future retirees.
• Require 40 years of participation in the system to earn full benefits, as opposed to the present 35 years.

The app also provides several variations for each of the above methods of reducing benefits and suggests some possible benefit enhancements for low-income beneficiaries and support for working parents by permitting five years of coverage for the care of children younger than six years old, instead of work.

One Potential Solution After using the Social Security Challenge app, I opted for a combination of tax increases, benefit reductions, and benefit enhancements as follows:

• Eliminate the benefits and contribution tax base and count all earnings for calculating benefits. This would reduce the estimated funding gap by 58%.
• Gradually raise the normal retirement age from 67 to 69 and increase the early retirement age from 62 to 64. This would reduce the estimated funding gap by 25%.
• Decrease benefits for higher-earning retirees in 2030 and beyond. This would reduce the estimated funding gap by 23%.
• Add the benefit enhancements for low-income retirees and support for working parents. This would increase the funding gap by 7%.