After incurring another $1 trillion of debt in five months, the U.S. national debt topped $40 trillion. Everybody thinks we need to cut back on government spending, but everyone wants to cut their neighbors’ benefits, not their own. Social Security once again finds itself on the verge of depleting its trust fund by 2032. The largest single block of voters with the highest percentage of voters are “seniors,” so any politician who wants to be re-elected needs to help find a solution.
Let us be clear; it is not the end of Social Security. If that happens, recipients’ benefits would be cut about 21%. It does not mean that there is no money for Social Security, as those that are working are still contributing. Congress will eventually fix the problem, but it is likely to be later rather than sooner because there is no easy fix. Benefits will go down; taxes will go up. So, what is likely to happen? Here are some possible solutions – none of which by themselves solves the problem.
- Currently, up to 85% of Social Security is taxable if one’s income is over $34,000 and no change because of inflation has happened since the mid-90s. The revenue created by this income tax on Social Security goes back into the Social Security trust fund. Expect that 100% will be taxable at some level of income.
- Next, the cap on earned income subject to tax, currently $184,500, will increase dramatically but phased in over time. Social Security taxes are paid by workers and their employers, so the higher cost is likely to reduce consumers’ spendable income and corporate profits. While this is a negative in the short run, we think the economy will adjust over time. The cap could create a donut hole where the tax stops at a certain layer of income and then picks up at another, or the cap could disappear entirely. While this latter point may sound good politically, it is unlikely to happen.
- Raise the tax rate on both the employee and employer over time by 1-2%.
- For those under the age of 50, they are likely to see a delay in their ability to access Social Security with the earliest age phasing from 62 to 65 and full retirement age rising from 67 to 70 over time with no further increase in benefits except cost-of-living increases.
- A cap on the maximum amount of benefit anyone can receive regardless of the amount they may have paid in employment taxes.
- The cost-of-living increase each year could be modified to make it grow more slowly.
- Institute a Social Security tax on interest, dividends, and capital gains.
- Lastly, expand the workforce as quickly as possible.
Needless to say, none of these are popular, but there are not many alternatives. When Congress takes up the matter, you should expect the “fix” to be some combination of the above.
