“The economist John Maynard Keyes said that in the long run, we are all dead. If he were around today, he might say that, in the long run, we are all on Social Security and Medicare.” – Ben Bernanke, Former Federal Reserve Chairman
Last week we discussed the solvency and current framework for the Social Security system. While there are definitely cracks in the Trust Fund we also learned that payroll taxes are the primary funding source in today’s system. The next question we need to answer then, is what options do we have if the payroll tax system becomes ineffective? What options are there to extend and/or improve the social security system for current and future generations?
Demographics (an aging population) play a large role in the current decline of the trust fund. “While there were 3.3 covered workers per OASDI beneficiary in 1985, there were only 2.7 workers per beneficiary in 2023.” – kitces.com. So, as we move forward ideas to close the gap are prevalent. To date, the political will to make changes hasn’t been evident. Here are a few alternatives that might eventually make the docket.
- Increase the payroll tax
- Reduce benefits for current and future beneficiaries
- Subject all wages to the payroll tax rather than the first $168,600 as is the case now
- Raising the full retirement age from 67 – 68 (or higher)
- Raising the full retirement age and then indexing it for longevity
- Reduce benefits for higher earners or slow the growth of their benefits
Some have also called for reductions in Cost of Living Increases (COLA) as well. The new guidance for 2025 came in at a 2.5% increase which is down drastically from a few years ago in the height of the inflation surge.
My best guess is that these potential reforms will land in some kind of congressional blender and come out with slivers of each solution. Many may also have caps in their amounts and the time they are in effect (consider the debt ceiling nonsense we seem to confront every few months).
Want to come up with your own solution? Well, we have a website for that!
https://www.crfb.org/socialsecurityreformer/
Good news – I clicked on two of the potential solutions and closed 97% of the funding gap. Take a look and send me what you think the best solutions are to close our long term funding gap.
Next week we will discuss how we should handle our financial plans in the throes of SSI uncertainty. For many we don’t expect big changes but even something small like a modification to COLA could require quick, meaningful updates to retirement cash flow projections.
