A new administration will assume office at the White House early next year, following the outcome of the upcoming presidential election. One of its most pressing issues will be the future of Social Security.
Despite an impending funding crisis that could lead to benefit reductions within the next decade, Social Security has not received much focus in recent campaigns.
Both major candidates, Democratic Vice President Kamala Harris and Republican former President Donald Trump have presented a range of proposals to garner voter support but have not thoroughly addressed the program’s sustainability.
With an annual cost of $1.3 trillion, or 5% of the U.S. GDP in 2023, Social Security is the largest direct expense in the federal budget, funded by a combination of taxes and trust funds.
Impending Changes to Social Security Post-Election
Nearly 70 million retirees, individuals with disabilities, and families of deceased workers depend on Social Security payments each year. Experts believe that the next administration must tackle the depletion of the Old Age, Survivors, and Disability Insurance (OASDI) program’s trust funds.
According to the Social Security Administration’s Office of the Inspector General, without intervention, a 21% reduction in benefits could take effect by 2034. Yet, Social Security reform remains largely overlooked in current campaign discussions.
While various tax reform proposals, such as removing certain levies and increasing payroll taxes for high-income earners, have been suggested, neither candidate has directly tackled the funding shortfall. A stable future for Social Security is a top concern for voters, as many Americans rely on the program for over 40% of their retirement income.
The Committee for a Responsible Federal Budget (CRFB) warns that if Social Security’s financial stability is not addressed, a retired couple with average earnings in 2033 could see their retirement income reduced by $16,500 annually.
Economic Impact of a Social Security Benefit Cut
Stephen Kates, lead financial analyst at RetireGuide.com, emphasizes that without corrective actions, the projected 20% reduction in benefits would severely affect many retirees’ financial security and lifestyles.
The Social Security Administration has faced similar funding issues in the past; in the early 1980s, under President Ronald Reagan, reforms were enacted to stabilize Social Security’s finances for decades.
The Greenspan Commission was established in 1983 to recommend long-term solutions, aiming to keep Social Security sustainable until around 2060.
Potential Solutions for Social Security
According to Burt Williamson, a retirement expert with Connecticut-based PlanPrep, the incoming president should prioritize Social Security reform by creating an executive order to establish a bipartisan panel.
This panel would be responsible for analyzing the program’s financial situation and suggesting feasible solutions.
Options for Securing Social Security’s Future
Williamson suggests gradually lifting the payroll tax cap, which limits taxable earnings to $176,100 in 2025 (and $168,600 for 2024). Currently, this cap is taxed at 6.2% for Social Security contributions by both employees and employers. Raising the cap or removing it entirely could generate substantial revenue, primarily impacting the top 6% of wage earners.
Another proposed strategy involves allocating up to 10% of future Social Security revenues to a longevity account—a separate investment portfolio within the Social Security trust fund. Managed by a nonpartisan committee, this account would be dedicated to long-term stability and would remain inaccessible to other government programs.
The Heritage Foundation has suggested raising the retirement age as another way to secure additional funding. Additionally, the American Academy of Actuaries proposes increasing the Social Security tax rate from 6.2% to 7% to further bolster program funds.
| Proposed Solution | Details | Impact | Affected Group |
|---|---|---|---|
| Remove Payroll Tax Cap | Taxable earnings cap removed gradually | Increase in Social Security revenue | Top 6% wage earners and employers |
| Longevity Account | Invest 10% of future inflows into a separate account | Long-term financial stability | Managed by nonpartisan committee |
| Raise Retirement Age | Gradual increase in retirement age | Additional funding for Social Security | Future retirees |
| Increase Payroll Tax Rate | Adjust tax rate from 6.2% to 7% | Boosts Social Security contributions | All working Americans |
FAQs
Why is Social Security facing a financial shortfall?
Social Security’s trust funds are depleting due to an aging population, longer life expectancies, and a larger retiree base, resulting in more payouts than incoming funds.
How would removing the payroll tax cap help Social Security?
Eliminating or raising the payroll tax cap would allow high-income earners to contribute more, significantly increasing revenue for the Social Security program.
Are any changes planned to raise the Social Security retirement age?
Raising the retirement age is one proposal under consideration, as it would extend the period workers pay into the system and shorten the benefit payout period.
What is the longevity account, and how does it work?
A longevity account would invest a portion of Social Security inflows in a separate fund for long-term stability. It would act as an independent source within the Social Security trust, untouched by other government programs.
Will current Social Security recipients be affected by these changes?
Immediate changes, if implemented, would more likely impact future recipients. However, some adjustments, like tax cap modifications, could affect high-income contributors in the short term.