A solution to keep Social Security solvent

[BrianL306623]

We recently received an email from AARP requesting us to email Congress for the continued funding of Social Security. While this is a worthwhile endeavor, it does not provide a solution and who knows how many folks will actually send the message. So, I am advocating for AARP to be more proactive in how they and their members reach out to Congress. AARP should have some political clout and therefore should use it to our advantage. The unions would be another avenue to pursue!

There is a report authored by the Congressional Research Service titled, “Social Security: Raising or Eliminating the Taxable Earnings Base”. This report (https://crsreports.congress.gov/product/pdf/rl/rl32896) was updated on December 22, 2021. The conclusion of this report is as follows:

“Raising or eliminating the cap on wages that are subject to taxes could reduce the long-range deficit in the Social Security trust funds. For example, the Social Security Administration's Office of the Chief Actuary (OCACT) estimates that phasing in an increase in the taxable maximum (for both contributions and benefits bases) to cover 90% of covered earnings over the next decade would eliminate nearly 20% of the long-range shortfall in Social Security. OCACT's estimates also show that if all earnings were subject to the payroll tax, but the current-law base was retained for benefit calculations, the Social Security trust funds would remain solvent for about 35 years. However, having different bases for contributions and benefits would weaken the traditional link between the taxes workers pay into the system and the benefits they receive.”

In 2022, the maximum Social Security tax - formally called the contribution and benefit base, and commonly referred to as the taxable earnings base or the taxable maximum - was $147,000. It is currently $168,600 and going to $176,100 in 2025. Since 2009, the annual salary for Congressional members is $174,000 and for the Speaker of the House: $223,500, the Majority Leader: $193,400, and the Minority Leader: $193,400. This means even Congress has not been paying their fair share into Social Security.

I am but one person and AARP is millions of people. Will everyone please get this word out?

[BrianL306623]

So, where do we go from here? You make good points, and I agree 35 years is not enough, yet we have to start somewhere. No, I do not think it is an easy solution, nor do I think it is perfect, yet I think it is a start! My point is that the Congressional Research Service has put something forward that can begin to 'fix' the SS issue, yet it is not being acted on! You may throw as many darts as you want, yet there has to be a beginning. So, how do we get Congress do get off their collective duffs and do something?  My hope is the collective pressure from groups like AARP, the unions across the country, etc., to put their weight on Congress to get it done. Of course, the solution also has to take into consideration of your points, those of @Tonster521, and other minds to make the solution sustainable. I am not a pie in the sky person, I am practical and a journey of a thousand miles begins with one step. Not my quote! 😉

[GailL1]

@BrianL306623 

The CRS reports don’t put anything forward - ALL they do is explain the current process or proposals to Congress - When a proposal is made, the authors(s) request an analysis by the Social Security Acrtuaries and if their proposal doesn’t meet their expectations, they can go back to the drawing board to tweak their proposal and the numbers therein.

Several of these proposals involve raising the taxable maximum but not all at once.  Some of them say they will raise the tax max on workers that make more than $ 250.000 or over $ 400,000 (since the current administration had promised not to raise taxes on those making less than $ 400,000).  The proposals would leave the current way of raising the tax max in place and just let that figure catch up to the whatever other figure - $ 250,000 or $ 400,000 - when that catch up happens sometimes in the future, then in essence, all W2 income would be taxed for contributions.  

But then, unless the benefits formula is changed, this will not accomplish too much because those who are then contributing more would be getting a bigger benefit.  So the solution there is to add another (or more than one) bend point to the benefits formula to the already progressive formula.

THE ONLY way that any CURRENT beneficiaries will have their benefits affected is if we DO NOTHING - then the law will take affect sometimes in the future (about 2035 or there about) when insolvency happens - meaning when we can no longer pay benefits out of contributions and other Trust Fund income methods.  Those cuts as presently presented based on the numbers would be about a 20%+/_ reduction in benefits.

We can make changes to the contribution %, we can change the full retirement age (FRA)incrementally from 67 to 70 for those who are say, now in their 30’s or 40’s - that would also get rid of the delayed retirement credits which we pay out now at a very nice % for those who don’t file for benefits until 70.  Those would no longer apply if we raised the FRA to 70.  

We can modify benefits for those who won’t retire for the next 20 - 30 years.  We could tax those who get benefits but yet pay no contributions like non-working spouses.  We could modify the Family Max benefit amount or cut out some of the Divorced Spouses benefits especially if there are several of them and no dependents involved.  

Our Social Security and Medicare systems have become explosive political subjects.  That’s why whatever solution has to be a REAL bipartisan effort.  I am not sure we are there yet.  

We have people that have not prepared themselves for the time in their life they can no longer work.  I am sure there are many reasons why they didn’t or couldn’t.  Things over time just get more and more expensive and if we have a real inflationary period like we did in 2022 - 2023, then those daily living cost hit them very hard because they have nothing to fall back on - THIS HAS TO CHANGE.  We have to stress the importance of retirement savings to those especially younger than 55.  

We definitely don’t need to add anything to benefits before we get hold of the financial problems we have with the SS system now.  Many of those proposals being put forth are exactly that - added benefits.

People who are now within the systems of Social Security and/or Medicare who make a good retirement income from various sources already pay more back into these systems - They pay MORE in taxes on their benefits, they pay MORE for their Medicare Part B and Part D premiums (IRMAA surcharges).  They may pay in more to Medicare if they sell their home - again a surcharge.  

Maybe it is time to start thinking in “us” rather than “them”.  

[BrianL306623]

I understand the perspective of the CRS. Yet, someone in Congress reads it. Do nothing?  Really? As the CRS report stated, if the cap is raised or eliminated, we can have solvency for at least another 35 years.  That would help the current beneficiaries as I do not see why/how it would not! 

IMO, the issue with savings is that the govt is too willing to give out money and folks may actually expect it when they come of age. Also, the problem with unemployment!

Bottom line - we need to do something. Yet, it will take Congress to pull their collective heads out of their bottoms and work together! 😉

[GailL1]

@BrianL306623 

Do something ?  That’s the problem, nobody can agree on what to do -

Just like this one that you have brought forward in this post - look at the various options - starts about page 20 of this CRS report.  There are (4) Options with several sub-options under each of the (4). 

There are CRS reports on many of the other proposals 

Here’s one on the Retirement Age 

CRS Report - Social Security Retirement Age 

Tons of different proposals under this one too but the one that changes both the FRA (full retirement age) and the EEA (early eligibility Age) on page 16 is the most savings of the shortfall - 44% 

Again, tons of proposals but each one has their likers and their dislikers - You cannot take a program that influences the lives of so many, so drastically and change it so that everybody is all onboard unless you don’t care about the personal, societal and political consequences - and in many instances, this means the job of those who has to make the decision to make the changes.

Republican President Reagan and Democratic House Leader Tip O’Neill made changes back in the 1980’s that brought the SS program back from the brinks - They did a bit of lots of stuff - yes, many were upset but we made it through - those 40+ years.

Most likely that is what it is gonna take this time too - a bit of a lot of stuff.

At the end of The Trustee Report the same language is included every year -

“ Lawmakers have many options for changes that would reduce or eliminate the long-term financing shortfalls. Taking action sooner rather than later will allow consideration of a broader range of solutions and provide more time to phase in changes so that the public has adequate time to prepare.”

Social Security Trustee Report 2024 Summary  

[BrianL306623]

Yes, there are obstacles & differences, yet that does not mean it cannot get done. I guess I am not such a negative Nancy, and I look for ways to get it done rather than throw dirt on the mud pile.

[GailL1]

Oh, I am not saying that we should not get it done - I am saying that it is gonna have to be a lot of things affecting many different segment of participants to fix it - not just one or two things that end up affecting just one segment of the members.  

Can it be done - is the other thing.  I am doubtful just because there is such disagreement on the program and how to fix it and/or make it better.  

as always, any legislation to fix it will be done when it gets critical or we will just let the reduction play out and go from there.

[Tonster521]

@BrianL306623 From a fiscal perspective, the SS Program pays more benefits than revenue received. That is a formula for failure. You probably are aware of the proverbial statement, " If you fail to plan, you plan to fail". So, the SS Program needs to increase revenue, cut benefits, or some combination of both. In addition to your suggestion, I believe closing the S Corp tax loophole has great value for increasing FICA revenue especially Medicare taxes as well as Federal Income Taxes. FYI, many businesses (of various sizes) file taxes as a S Corp to avoid or reduce (or possibly evade) paying taxes for both Federal and FICA. Money is paid out as a distribution (i.e., dividend,etc.) in lieu of a salary/earnings which does not increase their federal tax bracket and is not subject to FICA taxes. You do not need to be a huge corporation such as Apple, Amazon, etc. You can be the owner of a small business such as a hot dog stand, financial service (insurance/investments/real estate), law firm, etc.

There are other inequities in the SS Program that are favorable to highly compensated folks. One can look at the PIA formula. Should higher compensation folks who will qualify for SS Benefits at the third Bend Point be contributing at a higher percentage (greater than 6.2%)? In other words, use a percentage similar to the Withholding Percentages for Federal Income Taxes. Currently, higher compensation folks receive three calculations in the PIA formula for 6.2% FICA tax. Most other folks only receive two calculations in the PIA formula for 6.2% FICA tax. From a mathematical perspective, the higher compensated folks receive a great deal especially when SS Spousal Benefits are added to the calculation. I thought it may be helpful to include some articles https://www.collective.com/blog/s-corp-social-security and another which has been used as an example https://www.washingtonexaminer.com/opinion/2641619/joe-biden-is-a-tax-loophole-hypocrite/   

[BrianL306623]

All good points and information.  We have to start somewhere and eliminating the tax cap is the low lying fruit!

[Tonster521]

@BrianL306623 It is a start. However, I believe there will be a negative reaction if the SS Program does not include the higher taxable earnings base in the PIA formula. Will the higher earnings be included in the Average Indexed Monthly Earnings (AIME)? If so, the SS Program will be paying additional (greater) benefits including SS Spousal Benefits (if eligible). And, there may be more than one SS Spousal Benefit payable if the high earner had multiple marriages. Using a high earner who starts SS Benefits at Full Retirement Age in 2024 with the required 35 years of maximum earnings and has only one spouse who is also at FRA, their SS Benefit would be $3,822 and $1,911 per month, respectively. If the spouse did not work and contribute for 40 quarters or 10 years, the Spousal Benefit ($1,911 or $22,932/year) is just about equivalent to the SS Benefit of the average worker who contributed for 35 years or more.Granted, not every person will qualify for the SS Benefits that I used in the above example. However, it should be clear that revisions to the PIA formula and contribution requirements need to be reviewed as well. Perhaps there should be "means testing" to limit SS Benefits. The SS Program which is a social insurance benefit was initially created to keep people above the poverty level after one is no longer able to work. It is not a wealth transfer program to benefit high earners.

Another issue that has not been addressed by Congress is the declining SS base. We have been hovering around a 62% Labor Participation Rate for years https://fred.stlouisfed.org/series/CIVPART . We were at higher rates in the early 2000's (i.e., approx. 66% to 67%) which helped to continue increasing the SS Trust funds. You can review the various stats that the Feds disclose in the link that I provided and will learn that there is only about 168 million in the civilian work force. There are about 268 million eligible based on age (16 yo 64). There are about 100 million not working. However, some are disabled or there are other reasons. Of that number, there are about 42 million that are not disabled and could be working. I believe they are called "discouraged" and not counted in any unemployment stats. This should be a priority for Congress. In other words, create policies and laws that provide employment  for our country which will help solve depleting the SS Trusts.

[BrianL306623]

Again, all good points. I like the idea of means testing although you & I know it would be a hard fight, yet one that can be won if Congress really wants folks to 'pay their fair share'! The employment roll is discouraging, and I am not one to pay someone for doing nothing when they are able to work, maybe not willing, yet ABLE! Your analysis is what is needed to get something passed. My whole point in my post was to hopefully get AARP to put forth a concerted effort because they have more backers than me. I would also like to see the unions get behind it because recent contract negotiations have eliminated pension plans.  Therefore, SS is even more important to aging workers. Thanks for your posts.

[Tonster521]

@BrianL306623 From a fiscal perspective, the SS Program pays more benefits than revenue received. That is a formula for failure. You probably are aware of the proverbial statement, " If you fail to plan, you plan to fail". So, the SS Program needs to increase revenue, cut benefits, or some combination of both. In addition to your suggestion, I believe closing the S Corp tax loophole has great value for increasing FICA revenue especially Medicare taxes as well as Federal Income Taxes. FYI, many businesses (of various sizes) file taxes as a S Corp to avoid or reduce (or possibly evade) paying taxes for both Federal and FICA. Money is paid out as a distribution (i.e., dividend,etc.) in lieu of a salary/earnings which does not increase their federal tax bracket and is not subject to FICA taxes. You do not need to be a huge corporation such as Apple, Amazon, etc. You can be the owner of a small business such as a hot dog stand, financial service (insurance/investments/real estate), law firm, etc.

There are other inequities in the SS Program that are favorable to highly compensated folks. One can look at the PIA formula. Should higher compensation folks who will qualify for SS Benefits at the third Bend Point be contributing at a higher percentage (greater than 6.2%)? In other words, use a percentage similar to the Withholding Percentages for Federal Income Taxes. Currently, higher compensation folks receive three calculations in the PIA formula for 6.2% FICA tax. Most other folks only receive two calculations in the PIA formula for 6.2% FICA tax. From a mathematical perspective, the higher compensated folks receive a great deal especially when SS Spousal Benefits are added to the calculation.