- Social Security is not in crisis, but the coming inability of Social Security taxes to cover benefits is close enough (2033-2034) to have prompted most presidential candidates to take a position.
- Republicans want to close the gap by reducing benefits.
- Democrats want to close the gap by increasing tax revenues.
- The enacted solution is likely to involve both lower benefits (at least for some) and higher revenues.
If you’ve reviewed page two of your Social Security statement recently, you know that something about Social Security “has to give.” According to the Social Security Trustees:
“Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because, by 2033, the payroll taxes collected will be enough to pay only about 77 percent of scheduled benefits.”
The Social Security system is very large and very complex. Its solvency over time reflects the evolving interplay between system receipts (Social Security taxes) and benefits paid (retired worker benefits, disability benefits, etc.). However, it’s easy to see that solving the problem will require more revenue, lower benefits, or both.
Payroll taxes fund the Social Security system. Both employers and employees pay these taxes. Currently, both pay 6.2% of the employee’s income – 5.9% toward retirement or OAS (Old Age and Survivor) benefits and .3% toward disability income or DI benefits. These tax rates apply to employee incomes up to the Social Security contribution and benefit wage base, which is currently $118,500 per year.
Your retirement benefit depends on your earnings history and your retirement date relative to your Full Retirement Age (FRA). Only your earnings up to the contribution and benefit wage base factor into calculating your benefit.
To calculate your benefit, the Social Security Administration (SSA) first adds up your lifetime real earnings (adjusted for inflation), counting only the earnings up to each year’s wage base. Then, it divides your lifetime earnings by the number of months you worked to obtain your “Average Indexed Monthly Earnings” (AIME). Your retirement benefit at your FRA grows with your AIME, rapidly for low AIME, and more slowly for higher AIME.
Your FRA depends on your birth year. For people born before 1937, FRA is 65. For those born in 1943 to 1954 it is 66, and for those born after 1960, it is 67. For those born between 1938 and 1942 it is between 65 and 66, and for those born between 1955 and 1959 it is between 66 and 67. (In 1983, the Congress changed the FRA in stages to address the last Social Security crisis).
You can start to receive your retirement benefits as early as 62 and as late as age 70. Your benefit will be .42% lower for each month before your FRA that you begin (5% per year). However, if you wait past your FRA to begin, you gain 8% per year, or .66% per month.
With that background, let’s discuss the various presidential candidates’ plans for “fixing” Social Security (that is, for bringing receipts and benefits into better balance).
The Boston College Center for Retirement Research has summarized all of the candidates’ proposals that it could identify in a comparison chart that you can reach on this page.
At the risk of incurring candidate wrath by eliding the nuances in their proposals, I will summarize.
Most Republican candidate proposals involve lower benefits by raising the Full Retirement Age and by reducing benefits for higher earners. The latter would involve reducing the rate at which the FRA benefit grows as AIME grows for those with higher earning histories. A few proposals call either for raising the age for first eligibility (currently 62) or for reducing the cost of living adjustment countering inflation.
In contrast, all Democratic candidate proposals involve larger revenue by increasing the wage base (in fact, they propose to tax all wages rather than only those up to the wage base limit).
In addition, the Democratic candidates all propose to increase benefits, although they don’t agree among themselves on how to do that.
What is likely to happen? I’m no political scientist, but here’s my amateur prognosis:
- If a Republican wins in a landslide, and the Republicans take both houses, watch for benefit reductions (for those not yet receiving benefits).
- If a Democrat wins in a landslide, and the Democrats take both houses, watch for revenue increases. We might also see some benefit increases.
- If there is no landslide, and divided government continues, watch for either
- No change (“kicking the can down the road”); or
- A compromise: a combination of benefit reductions and revenue increases (benefit increases are a long shot in this scenario).
The pessimist in me says that 2016 is too early, even with a landslide. Social Security revenues are large enough to cover benefits until 2033. That’s four presidential administrations from now, eight House of Representatives elections from now, two or three Senatorial campaigns from now. Both raising revenue and reducing benefits will be unpopular. “Unpopular” votes can lose elections, even if they are “essential.”