Question

List four policy changes that would make the Social Security Trust Fund more solvent.

Answer 1

The Social Security trust fund is expected to be exhausted in 2033. After that, there will be enough tax revenue coming in to pay out about three quarters of promised benefits. However, a few changes to the system could prevent these steep benefit cuts.

Below are the policy changes that would make the Social Security Trust Fund more solvent:

1. Increase Social Security taxes. Workers currently pay 6.2 percent of their earnings into the Social Security system up to $113,700 in 2013. If that tax rate was gradually increased to 7.2 percent by 2036 it would eliminate just over half (53 percent) of Social Security’s deficit. And if workers and employers each paid 7.6 percent, it would eliminate the financing gap.

2. Lift the payroll tax cap. Workers currently pay Social Security taxes on up to $113,700 of earned income in 2013. Individuals who earn more than this threshold don't pay Social Security taxes on that income. If this tax cap was gradually eliminated between 2013 and 2022 it would reduce the deficit by 71 percent. And if the tax cap were increased over 5 years to include 90 percent of all earnings (currently about 84 percent of earnings are covered) it would reduce the financing gap by 30 percent.

3. Raise the retirement age. The full retirement age at which workers can collect unreduced Social Security benefits is currently scheduled to increase to 67 for everyone born in 1960 or later. If the full retirement age was further increased to 68 by 2028 it would reduce benefits by about 7 percent and eliminate 15 percent of Social Security’s funding shortfall.

4. Means-test. Another potential Social Security change is to reduce or eliminate Social Security benefits for people who have retirement incomes above a certain threshold.

5. Change the cost-of-living adjustment. Social Security benefits are adjusted for inflation each year based on the Consumer Price Index for Urban Wage Earners and Clerical Workers. If an alternative measure of inflation, the chained CPI-W, were used it would decrease the annual cost-of-living adjustment by an average of about 0.3 percentage points and reduce Social Security’s deficit by 20 percent thus making it more solvent.