Now's the Time Now's the Time

Social Security

The original Social Security Act was signed into law by Franklin D. Roosevelt in 1935. The current version of the Act includes several welfare and social insurance programs, including Old-Age, Survivors, and Disability Insurance (OASDI). Social Security is funded, primarily, through payroll taxes, which are deposited in trust funds and invested in interest-bearing U.S. Treasury securities. As of 2020, there were about 65 million Americans receiving Social Security benefits – 50 million retired workers or their family members; 9.3 million disabled workers and/or their dependents; and about 5.9 million individuals, including 1.9 million children, receiving some type of survivor benefits.

Social Security’s Old Age benefits provide a foundation of retirement protection for people at all earnings levels, and it isn’t means-tested. In other words, it doesn’t reduce or deny benefits to people whose income or assets exceed a certain level. Social Security provides the majority of income to most elderly Americans; for about half of seniors, it provides at least 50 percent of their income, and for about 1 in 4 seniors, it provides at least 90 percent of income. Social Security provides a higher annual payout than private retirement annuities per dollar contributed because its risk pool is not limited to those who expect to live a long time, no funds leak out in lump-sum payments or bequests, and its administrative costs are much lower.

However, Social Security benefits are much more modest than many people realize. The average Social Security retirement benefit in June 2020 was about $1,514 a month, or about $18,170 a year. For individuals who worked all of their adult life at average earnings and retired at age 65 in 2020, Social Security benefits replace about 40 percent of past earnings. This “replacement rate” will slip to about 35 percent for a medium earner retiring at 65 in the future, chiefly because the full retirement age, which has already risen to 66, will soon climb to 67.Social Security benefits are modest by international standards, too. The United States ranks just outside the bottom third of developed countries in the percentage of an average worker’s earnings replaced by the public pension system.

Between 1983 and 2009 Social Security revenues exceeded expenditures which increased trust fund balances. The retirement of the large baby-boom generation, however, will lower balances, which today stands at $2.91 trillion. In addition, over the past few decades, the worker-to-beneficiary ratio has dropped drastically from 42 workers for every one beneficiary in 1945, to 5.1 in 1960, to 3.4 in 2000, to 2.8 in 2015. Projections forecast that the worker-to-beneficiary ratio will continue to decline to 2.3 by 2030.

Without legislative changes, trust fund reserves are projected to be depleted in the years 2034 and 2065 for the OASI and DI funds, respectively. Should depletion occur, incoming payroll tax and other revenue would only be sufficient to pay 76 percent of OASI benefits starting in 2035 and 92 percent of DI benefits starting in 2065.

There are several ways in which Congress can act to help save Social Security for future generations. It can: increase payroll taxes; increase the full retirement age; decrease taxes on Social Security income; and increase the income level subject to Social Security taxes, which today stands at $147,000.

Of these four options, I believe that the first two are unacceptable, while the last two are appropriate. Paying federal income taxes on up to 85 percent of one’s Social Security benefits (the current highest percentage) smacks of robbing Peter to pay Paul. These benefits should be tax-free, or at least be taxed at a vastly reduced.

Finally, upper income earners should have more, or even all, of their income subject to Social Security taxes. This option would affect only about six percent of the working population who earn more than the taxable maximum, and could go a long way in increasing the size of the trust fund. For example, the Congressional Budget Office estimates that subjecting earnings above $250,000 to the payroll tax, in addition to those below the current taxable maximum, would raise more than $1 trillion in revenues over a 10-year period. In addition, removing the taxable maximum entirely would adjust for increasing income inequality in America and the fact that higher-income individuals generally have longer life expectancies, and thus receive larger Social Security benefit checks for a greater amount of time.

As more and more Baby Boomers retire, the strain on the Social Security system will only increase year after year. We need to shore up the system for current and future retirees as quickly as possible. Now’s the time!