The Social Security trust fund is expected to be exhausted in 2033. After that, there will be enough tax revenue coming in to pay out about three quarters of promised benefits. However, a few changes to the system could prevent these steep benefit cuts. Here are five potential Social Security changes, and how much of the budget shortfall they would address:
[Read: 7 New Social Security Rules for 2013.]
Increase Social Security taxes. Workers currently pay 6.2 percent of their earnings into the Social Security system up to $113,700 in 2013. If that tax rate was gradually increased to 7.2 percent by 2036 it would eliminate just over half (53 percent) of Social Security's deficit. And if workers and employers each paid 7.6 percent, it would eliminate the financing gap. Some 69 percent of Americans support raising their own Social Security taxes by 1 percent, according to a recent National Academy of Social Insurance (NASI) and Mathew Greenwald and Associates online survey of 2,000 Americans ages 21 and older.
Lift the payroll tax cap. Workers currently pay Social Security taxes on up to $113,700 of earned income in 2013. Individuals who earn more than this threshold don't pay Social Security taxes on that income. If this tax cap was gradually eliminated between 2013 and 2022 it would reduce the deficit by 71 percent. And if the tax cap were increased over 5 years to include 90 percent of all earnings (currently about 84 percent of earnings are covered) it would reduce the financing gap by 30 percent. This change would affect the 5 percent of workers whose earnings exceed the cap, and they would receive somewhat higher benefits when they retire. Lifting the payroll tax cap is a popular idea, with 68 percent of Americans supporting the complete elimination of the cap, NASI found.
Raise the retirement age. The full retirement age at which workers can collect unreduced Social Security benefits is currently scheduled to increase to 67 for everyone born in 1960 or later. If the full retirement age was further increased to 68 by 2028 it would reduce benefits by about 7 percent and eliminate 15 percent of Social Security's funding shortfall. If the full retirement age was increased to 70 by 2050 it would reduce benefits by about 21 percent and the deficit by a quarter. Raising the retirement age is an unpopular idea, with only about a third (37 percent) of Americans supporting raising the retirement age to 68 and just over a quarter (28 percent) in favor of increasing the full retirement age to 70.
Means-test. Another potential Social Security change is to reduce or eliminate Social Security benefits for people who have retirement incomes above a certain threshold. For example, if benefits were phased out for retirees with non-Social Security income between $55,000 and $110,000, the deficit would be reduced by 20 percent. NASI found that 31 percent of Americans say they would like to means-test Social Security eligibility.
Change the cost-of-living adjustment. Social Security benefits are adjusted for inflation each year based on the Consumer Price Index for Urban Wage Earners and Clerical Workers. If an alternative measure of inflation, the chained CPI-W, were used it would decrease the annual cost-of-living adjustment by an average of about 0.3 percentage points and reduce Social Security's deficit by 20 percent. Using the chained CPI-W would increase a $1,000 monthly benefit by $27 instead of the $30 boost retirees would get using the current measure. Just under a third (30 percent) of Americans are in favor of reducing the cost-of-living adjustment.