I’ve blogged plenty on how the Federal budget deficits will keep interest rates higher, but we’re also hitting a wall with the aging population and a Social Security deficit. The longer the powers that be in Washington delay making changes, the more radical the adjustments will have to be.
Lawmakers face a critical 10-year deadline to resolve the Social Security program’s looming financial crisis. According to the most recent Social Security trustees’ report, without intervention, the program will be unable to pay full benefits by 2034.
After 2034, the report warns, the $2.9 trillion trust fund will be depleted. In the absence of legislative action, Social Security would rely solely on current tax income, resulting in the ability to pay out only about three-quarters of the scheduled benefits.
However, there is a silver lining. Several proposed policy changes to address the Social Security funding gap have garnered overwhelming support from voters on both sides of the aisle.
1. Raising the Payroll Tax Cap
Overall Support: 81% (Republicans 79%, Democrats 78%)
Currently, only the first $147,000 of income is subject to the payroll tax. A proposal to raise the payroll tax cap to $400,000 could significantly close the budget gap. Researchers estimate this change alone would eliminate 61% of the shortfall. With strong bipartisan support, this proposal could encourage policymakers to introduce legislation to make it a reality.
Congress has already seen some movement in this direction. For instance, Bernie Sanders and Elizabeth Warren have proposed increasing the payroll tax on all income over $250,000, including capital gains. Another proposal, Social Security 2100: A Sacred Trust, suggests raising the payroll tax cap to $400,000 on earned wages.
2. Reducing Benefits for High Earners
Overall Support: 81% (Republicans 78%, Democrats 86%)
Beneficiaries who earned higher salaries during their working years often have other retirement funding sources, such as pensions, 401(k) accounts, and other savings.
A proposal receiving strong bipartisan support would reduce benefits for the top 20% of earners, addressing 11% of the shortfall. Higher earners would still receive larger benefits than others, but these benefits would be less than under the current program.
3. Raising the Retirement Age
Overall Support: 75% (Republicans 75%, Democrats 76%)
One of the first changes to the original Social Security program enacted in 1983 was gradually increasing the full retirement age from 65 to 67. With people living and working longer on average, a new proposal suggests raising the retirement age slightly to 68. This change would reduce the budget shortfall by 14%.
4. Increasing the Payroll Tax Rate
Overall Support: 73% (Republicans 70%, Democrats 78%)
Currently, the payroll tax rate that funds Social Security stands at 6.2% of wages, up to the first $147,000 earned. Increasing the tax rate to 6.5% would eliminate 16% of the estimated shortfall.
5. Raising the Minimum Benefit
Overall Support: 64% (Republicans 59%, Democrats 71%)
Many lower-income earners rely on Social Security to provide most, if not all, of their income in retirement. Surviving on the current minimum benefit of $951 can be extremely challenging. Most Democrats and Republicans supported a proposal to raise the minimum benefit for someone who had worked for 30 years or more to $1,341, which would increase the shortfall by 7%.
6. Changing Cost of Living Adjustments
Overall Support: 55% (Republicans 55%, Democrats 59%)
There are various measures of inflation used by the government. Currently, Social Security benefits are adjusted annually based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). However, some argue this is not the best measure of inflation for the unique expenses incurred by older adults and instead favor using the Consumer Price Index for the Elderly (CPI-E). Making this change to better support the elderly would increase the shortfall by 12%.
7. Increasing Benefits for the Very Old
Overall Support: 53% (Republicans 53%, Democrats 56%)
While a small majority, there is still bipartisan support for increasing benefits for the very old. Increasing benefits for those over 80 by 5% would increase the budget shortfall by 5%, but it would help retirees cover mounting costs as they age.
While Congress has proposed most of the above options in some form or fashion, there is yet to be consensus on the path forward. Many politicians think that addressing the problems of Social Security is a ‘third rail’ so they have persistently avoided taking action. It’s been easier for the politicians to kick the can down the road. But large bipartisan majorities say they are ready to take tough steps to secure the Social Security program for future generations.
One thing is certain – the clock is ticking, and time is running out.
If you are in the Los Angeles area, and have any questions or real estate sales or financing needs, feel free to contact me
Ron Henderson GRI, SRES, SFR, RECS, CIAS, CREN, GREEN
President/Broker
Multi Real Estate Services, Inc.
Gov’t Affairs Chair – California Association of Mortgage Professionals (2017-2018)
Chairman – OutWest Marketing Meeting (Real Estate Education)
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