According to the Social Security Administration, the last 12 Trustees Reports, which report annually on the current and projected financial status of the Social Security program, indicated that reserves will be drained between 2033 and 2035. If that happens, scheduled tax revenues will be adequate to pay only about three-fourths of the scheduled benefits. Here are some of the legislative measures that policymakers have proposed to address the issue.
Raise the Retirement Age
One proposal is to gradually increase the retirement age. Currently, the retirement age is set at 67 for those born in 1960 or later. The proposal would increase the retirement age to 68 over the next decade, and eventually to 70 for people born in 1978 or later. Proponents of the increase claim that it would reflect longer life expectancies and help to ensure the program’s long-term sustainability. Critics of the increase argue that this would disproportionately affect low-income and blue-collar workers who have physically demanding jobs and may not be able to stay in the workforce as long.
Increase Payroll Tax Rate
The payroll tax rate funds Social Security. Employers and employees each pay 6.2 percent of wages up to the taxable maximum of $160,200 (the self-employed pay 12.4 percent). Under this proposal, the tax rate would gradually increase over the next decade, thereby garnering more revenue for the program. Advocates of this approach assert that it would be a fair way to fund the program, as it would require higher earners to pay more into the system. However, those against this move argue that it could discourage economic growth.
Invest in Private-Sector Stocks and Bonds
Social Security funds are invested in special-issue government bonds, and these bonds have a lower rate of return than stocks or other investments. Proponents of this move argue that investing Social Security funds in a diversified portfolio of stocks and bonds could potentially earn higher returns and increase the program’s financial sustainability. Critics point out the obvious risks and market volatility associated with investing in the stock market.
Change the Way Benefits Are Calculated
Social Security Benefits are based on a worker’s highest 35 years of earnings, adjusted for inflation. One proposal is to implement a formula that is less generous to higher earners. While this could address Social Security’s regressive aspects, where higher earners receive more benefits than lower earners, critics argue that this could disincentivize workers to increase their earnings and could dissuade entrepreneurship.
Invest in Private IRAs and Savings Accounts
Finally, some lawmakers have recommended creating individual retirement accounts (IRAs) or other private savings accounts as alternatives to Social Security, allowing individuals to invest a portion of their earnings in the stock market or other investments. While this would grant individuals more control over their retirement savings, and could potentially earn higher returns than the Social Security system, critics point out that private accounts expose individuals to market volatility, and that the Social Security program provides a safety net for individuals who may not have the means or knowledge to invest in private accounts.
