Social Security is hurtling toward a fiscal cliff.
The retirement trust fund faces a shortfall as soon as 2032. If Congress does nothing, research suggests, retirees will see a 28% cut in monthly benefits.
Fortunately, there’s no shortage of ideas for fixing Social Security.
“You and I could do it in an hour,” said Alicia Munnell, senior adviser at the Center for Retirement Research at Boston College. “It is not hard. It is just a question of will, which is totally missing.”
Congress will walk a perilous path in reforming Social Security, a program so precious to so many that it’s often termed the third rail in American politics.
All of the proposed fixes “ultimately come down to more money going into the system or less money going out of the system,” said Andrew Biggs, a senior fellow at the American Enterprise Institute. Simply put: You raise revenue, or you cut benefits.
Here are eight of the most popular proposals for closing Social Security’s funding gap, and the pros and cons of each.
How to Boost Revenue
Let’s start with four proposals that would raise revenue:
Raise the Cap on Income Taxed for Social Security
Social Security revenues come from a tax on incomes. But there’s a cap: In 2026, only incomes up to $184,500 are taxed to fund the benefits.
Raising the income cap would deliver more taxes to fund Social Security.
One proposal would raise the income limit to a level that covers 90% of all wages.
That cutoff “was kind of the goal” when Congress reformed Social Security in the 1980s, Munnell said. Over the years, however, the cap hasn’t kept up with wage growth among high earners. The current limit covers just over 80% of all income.
Resetting the cap at 90% would put the limit around $330,500, according to the nonpartisan Committee for a Responsible Federal Budget.
That fix, by itself, would close 26% of the Social Security funding gap, the CRFB estimates.
Remove the Income Cap
A more drastic option: Remove the income cap so that all worker income is taxed for Social Security.
“To me, the simple thing is scrapping the cap,” said Monique Morrissey, a senior economist at the Economic Policy Institute.
Eliminating the income cap would close 68% of the Social Security shortfall, CRFB estimates.
The argument against it: Scrapping the cap would burden high earners. Already, top earners receive a much smaller share of their past income in Social Security benefits than lower-income Americans.
Increase the Payroll Tax Rate
The money Americans pay into Social Security comes from a payroll tax. The total tax is 12.4% of your income, half paid by you, half by your employer.
A one-point increase in that tax rate, to 13.4%, would close roughly one-quarter of the Social Security funding gap, CRFB estimates. A two-point increase would close half of it.
In one proposal, “you go from 6.2% to 7.2% on both the employee and employer side,” Morrissey said, “and you do that over 20 years,” phasing in the increase.
The big downside: It’s a tax increase. And it would come at a time when “we’re going to need more tax revenues for everything else the government does,” Biggs said.
Closing the Social Security funding gap entirely with payroll taxes “would be the largest peacetime tax increase in history,” much of it levied “on a tiny share of the population,” he said.
Extend the Payroll Tax to Health Benefits
Under current law, the payroll tax applies only to income, and not to other forms of compensation, like health insurance.
Extending the payroll tax to cover employer health insurance contributions would close 23% of the Social Security shortfall, the CRFB estimates.
“If you have to do a tax increase, I think [this is] the least damaging one,” said Romina Boccia, director of budget and entitlement policy at the Cato Institute.
Now, here are four proposals that would cut benefits:
Raise the Social Security Retirement Age
Until the 1980s, 65 was termed the “full” retirement age for receiving Social Security. In 1983, with Social Security facing insolvency, Congress passed legislation that gradually raised the full retirement age to 67.
That’s the age when you qualify for full Social Security benefits. You can claim earlier, but your check is smaller. You can also claim later and reap an even larger payment.
With a new shortfall looming, one potential fix would raise the retirement age again. A one-year increase would close 12% of the Social Security funding gap, CRFB estimates.
Index Retirement Age to Life Expectancy
One downside to raising the retirement age is that any age you pick — 65, 67 or 68 — might seem arbitrary.
A more fact-based alternative, Boccia suggests, is to index Social Security’s retirement age to hard data on human life expectancy.
“Benefits are already indexed to a variety of government measures,” she said. “You do the same thing for the retirement age. It changes as longevity changes.”
In this proposal, the “full” retirement age would move up or down with changes in life expectancy, which has generally been rising over time.
The policy change would close 18% of the Social Security funding gap, CRFB estimates.
One drawback: Critics say raising the retirement age would unfairly disadvantage low-income Americans. Research shows a link between income and longevity: Older Americans living in poverty tend to die several years sooner than high earners.
Raising the retirement age “is really going to hurt low-income people,” Munnell said.
Slow Benefit Growth for Higher Earners
Social Security benefits are progressive: The lower your income, the more of it you get back in your Social Security checks.
Under current law, Social Security “replaces” 90% of your income up to $1,286 a month. The replacement rate drops to 32% for incomes between $1,286 and $7,749, and to 15% for incomes above $7,749.
Changing the percentages could save money. One proposal would add a fourth bracket, with replacement rates dropping from 90% to 30%, 10% and 5% as income rises.
The math is complicated, but the CRFB estimates the change would close 41% of the Social Security funding gap.
Cap Social Security Benefits
A final proposal calls for capping the total Social Security benefit retirees can draw in a year. Recently, the CRFB suggested capping benefits at $100,000 for couples, $50,000 for single retirees.
Enacting a “Six Figure Limit” on benefits, indexed to inflation for future years, would close at least one-fifth of Social Security’s funding gap, CRFB estimates.
“The idea that anybody needs a $100,000 Social Security benefit is crazy,” said Biggs, an early proponent of the cap.
Critics warn, though, that a benefit cap could eat into benefits for the middle class.
“In Santa Cruz,” the affluent California enclave, “$50,000 a year is a lower income,” Morrissey said. “It’s not enough to make ends meet.”
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