As the race to select a Democratic nominee for the 2020 election heats up, candidates are being asked what they think should be done to “save” Social Security.

This of course begs the question of whether or not Social Security even needs saving. In what sense is this program in trouble?

For many Americans, Social Security is an essential income source. The retirement benefit provides a majority of income for over 60% of beneficiaries, and a third rely on it for 90% or more of their income, according to the Center on Budget and Policy Priorities. In June 2019, the average monthly retirement benefit from Social Security was $1,423.

The Social Security program is funded through payroll taxes. The payroll tax amounts to 12.4% of a worker’s salary, but that percentage is split between the employer and employee evenly, so that each is contributing 6.2% (except for those who are self-employed).

This payroll tax only applies to a certain level of wages – currently $132,900 per year. Income above that is not assessed the tax. So workers with higher wages stop paying into the Social Security program after meeting the cap; for many high earners, that happens around mid-February. In contrast, someone earning $50,000 would pay taxes for Social Security until the end of the year, according to the Center for Economic and Policy Research.

Social Security is primarily a pay-as-you-go system, where the money you and your employer contribute now is used to fund payments to people who currently receive benefits.

When the Social Security program receives more in taxes than it pays out in retiree benefits, it generates a surplus. This was the case for decades. However, when the Baby Boomers (those born between 1946 and 1964) started retiring, the ratio of workers to retirees began to shrink, and so it is anticipated that in 2020 total income from payroll taxes will be less than expenditures on benefits.

Obviously, if expenditures exceed benefits for a prolonged period, eventually the system will run out of funds. This is to be expected, and should not surprise anyone with a basic understanding of mathematics.

So, what are some potential fixes for the program, so that it can continue to pay out the benefits that have been promised to workers?

Change the ratio of workers to retirees
As noted above, if the Social Security system takes in more in payroll taxes than it pays out in benefits, it generates a surplus. The system now is projected to run deficits. Conceptually, an easy fix would be to increase the number of workers to beneficiaries. But the US birth rate hit a 32-year low in 2018, and the Baby Boomers continue to retire. Immigration is a help, but the numbers are too small to make a significant impact. So, changing the ratio of workers to retirees is, at least for the next several decades not a realistic fix for the system.

Raising the payroll tax wage cap
Democratic presidential candidate Pete Buttigieg, the mayor of South Bend, Indiana, proposed more than doubling the cap of income eligible for payroll taxes from what it is now at $132,900 to about $250,000.

Increasing the payroll tax
Increasing the payroll tax from its current level of 12.4% (split equally between employer and worker) would generate more revenue for the system.

Raising the retirement age
The original Social Security Act of 1935 set the minimum age for receiving full retirement benefits at 65. In 1983, Congress passed legislation that began gradually increasing the minimum age for full retirement benefits from 65 to 67.

Since the program first began paying monthly Social Security benefits in 1940, the average life expectancy for men reaching age 65 has increased nearly 7 years to age 84.3, and for women reaching age 65, nearly 7 years to age 86.6.

Given the increases in life expectancy, it’s not unreasonable to assume that (one part of) a potential fix would be for Congress to raise the retirement age to 70 over a period of time.

Changing how benefits are indexed for inflation
There are a variety of ways to calculate how benefits paid can be indexed for inflation. These include changing the reference index used to determine the inflation rate.

In all likelihood, the “fix” for Social Security will likely be a combination of a few of the strategies outlined above. For example, simultaneously gradually raising the retirement age, increasing the wage cap, and increasing the payroll tax.

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