Due to changing demographics, the Social Security trust funds — established when there was a surplus — are scheduled to be depleted in 2033. At that point, the program would be able to pay about 77% of scheduled benefits based on the contributions of current workers.1
A recent poll of Americans aged 50 and older measured attitudes toward four potential changes to strengthen the Social Security system (see chart). This age group forms a powerful voting block and could be directly affected by any changes, so their opinions may be important in future budget negotiations.
Raise the earnings cap. In 2014, earnings up to $117,000 are subject to Social Security payroll taxes. Raising the cap would generate more taxes to help support the program. This was by far the most popular choice.
Reduce benefits for high-income beneficiaries. Benefits are based on the highest 35 years of career earnings, regardless of current income. Reducing benefits for those with higher incomes would free more funds to maintain benefit levels for other beneficiaries.
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Raise the eligibility age gradually. The eligibility age has already been raised from 65 to 66 for those born between 1943 and 1954, and to 67 for those born in 1960 or later. Raising it further could reduce program expenditures.
Change the COLA calculation. The annual cost-of-living adjustment (COLA) is linked to the consumer price index for urban wage earners and clerical workers (CPI-W). Leaders of both parties have expressed support for linking the COLA to the chained CPI, which assumes that consumers will make substitutions when certain goods or services become more expensive.2 It’s estimated that using the chained CPI may reduce future COLAs by only 0.3%, but this would add up over time for individuals, and the total program impact — with more than 57 million beneficiaries — would be substantial.3–4
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Considering the fiscal challenges facing Social Security, some changes are required, but this could take time and it’s unlikely that they would apply retroactively. You might want to keep an eye on future developments.
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1, 4) Social Security Administration, 2013
2) Associated Press, November 3, 2013
3) AARP, 2013
The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2014 Emerald Connect, LLC
