Social Security Realities, Risks, and Recommendations
As it is often referred to as “an entitlement,” it is easy to get the impression that Social Security is a government give-away program. The reality is that Social Security is primarily funded by payroll taxes (FICA). Employees and employers both contribute 6.2 percent “up to the taxable maximum of $137,700.” If you work long enough, you could be eligible to start drawing on Social Security as early as your sixty-second birthday (if you are willing to accept reduced benefits).
Social Security’s Role in Retirement
Social Security helps keep older adults financially afloat—though for some, not by much. According to an August 2020 Center on Budget and Policy Priorities facts sheet, the average Social Security benefit in June 2020 was $1514 per month ($18,170 per year). Approximately 25% of retired adults rely on Social Security for 90% of their income and about 50% depend on Social Security for at least half of their income.
Women, who tend to earn less and may take time off from work to do caregiving, are more likely to end up with lower benefits than men. Women are also more likely to take Social Security earlier and then end up with reduced benefits. Forty percent (40%) of women compared to 35% of men start drawing Social Security at the age of sixty-two.
Concerns about the Future of Social Security
In spite of the significant role Social Security plays for millions of older and retired adults (both now and in the future), a recent Axios article noted a 2020 AARP survey found that 57% of adults were not confident about the future of Social Security. Further, “respondents’ plans to rely on Social Security were nearly identical across party lines.” And, in spite of different political affiliations, a majority of those who responded were concerned that their retirement savings could be wiped out as a result of a major illness or a significant economic downturn.
Is Social Security a Sinking Ship?
Indeed, there is good reason for worry about the financial health of Social Security. Experts predict that around 2035 (if not sooner) the System will not be able to pay full benefits unless some changes are made. Financial expert, Ben James, CFA, CFP, explained, “According to the Social Security Trust fund actuaries,” the problem isn’t that people are living longer; instead, it is that we have had a low birthrate today. Currently, there are approximately 50 million Social Security beneficiaries and 150 million workers; that means we have three workers paying into the Social Security system for every recipient. However, the ratio of workers to beneficiaries is likely to decrease from 3:1 to 2:1 within the next 17 years. “If we don’t make changes by 2032-2037, it is estimated the reserves will be exhausted. At that point, only 75% or so of existing benefits would be paid out under the current law. Please keep in mind though, Social Security isn’t going away.”
The Myth of the Immigrant Worker and Social Security
A common myth is that undocumented workers are taking advantage of Social Security and are hurting those who have been legitimately paying into the system. Contrary to what some might believe, illegal immigrants cannot get a Social Security card. However, Sean Williams reports that according to an analysis from the New American Economy “undocumented immigrants contributed $13.3 billion into the system via the payroll tax in 2016.” (Undocumented workers have used borrowed or fake Social Security cards so that they can get work.)
Legal immigrants who are not citizens but have approval from Homeland Security to work can potentially earn Social Security Benefits, and that could be “a very good thing for the Social Security program.” Many legal immigrants are younger and plan to remain in the workforce for many years, thus helping to support the program for longer
Potential fixes and Pitfalls for Social Security?
James says that fixing Social Security is a matter of collecting more or paying out less. This could mean increasing Social Security payroll taxes from 12.4% to 14.4%, or immediately lowering benefits by 13%, or increasing the full retirement age (FRA) beyond 67, or some combination of all three.
A Center on Budget and Policy Priorities report suggested that modest changes could go a long way towards restoring Social Security to full health. The Center suggested increasing Social Security tax revenues by boosting Social Security payroll. Yet, under the bipartisan-supported CARES Act passed in March, employers can defer payroll taxes (FICA) until the end of the year. Now a majority of workers may also be able to defer payroll taxes until January 2021.
White House Proposal
President Trump recently floated the idea that if he were re-elected, he would end the payroll tax permanently. Social Security, he argued, could be paid out of the general fund. This proposal does have its critics. Writing for Marketwatch, Paul Brandus wonders where the money will come from. He notes, that we’ve spent trillions in emergency spending because of the pandemic and now have a deficit that is now approximately $26.5 trillion dollars (up $7 trillion in less than four years). Shai Akabas, director of economic policy at the Bipartisan Policy Center expressed concern that a permanent payroll tax cut “would likely get little support on Capitol Hill.” However two financial experts writing for CNBC argue that this proposal could “unleash the power of labor markets” and, if the minimum wage for Social Security was gradually increased, it could reduce the deficit.
As he shared with Fox News, Senator Mitt Romney (R) has proposed the Trust Act. This Act would involve setting up a bipartisan commission with six Republicans and six Democrats representing both the House and the Senate who would work together to keep Social Security, Medicare, and other trust programs solvent. “Each one of the trust funds would have a separate super-committee or rescue committee set up to evaluate different proposals to get them solvent.” These hearings would be open to the public.
The Biden approach to saving Social Security would involve some tax increases. Presidential Candidate Joe Biden has proposed that the income cap for paying Social Security is increased from $137,700 to $400,000.
Biden has also indicated he would roll back President “Trump’s 20% long-term capital gains tax on investments and restore the 39.6% top tax rate for those making over $1 million.” Taxes would “would impact upper-income Americans the most.”
A Call to Action
In 2016, the Pew Research Center reported that 56% of voters were fifty or older. A recent AARP article states that “voters 50+ likely to maintain position as “powerful decision-makers,” All of us have too much at stake to sit by and wait for Congress to take some action. Regardless of what approach you believe needs to be taken, something must be done, and very soon to restore Social Security to full health.