Is There a Fix for Social Security?

Most of us know that Social Security is in trouble. With funds expected to run out in 2035, many retirees and pre-retirees are scratching their heads, and in some cases feeling quite nervous, about the fate of this program and how it will affect their retirement. 

A recent Morningstar article by John Rekenthaler gave some excellent perspective into what some “fixes” to Social Security might look like. He defines a “fix” as one or more combinations of revenue increases or cost reductions which support the financial viability of Social Security for at least another 75 years. 

I thought I’d take some time this month to explore Rekenthaler’s findings. If you have a few minutes, I’d encourage you to read his excellent article, linked here.

As with most government programs and business in general, fixing Social Security, Rekenthaler argues, really comes down to two options: Bring in more revenue or cut the benefits. None of these are popular, but some are less popular than others.

Bring in More Revenue

The fastest way to fix Social Security is to eliminate the payroll tax cap. Only earnings up to a certain amount ($160,200 in 2023) are taxed for Social Security purposes. This means any dollar you earn above this amount is not taxed for Social Security. This makes sense to me in at least one respect, since lower income earners tend to receive a disproportionately higher Social Security benefit compared to higher earners, thus why should the higher earners be taxed more? 

Still, eliminating this cap alone restores 88% of Social Security’s solvency. That’s impressive, but it’s a significant tax increase, which would likely be very unpopular. 

There are other ways to increase revenues to help maintain Social Security. Rekenthaler states that a 2% increase to payroll taxes would restore 61% of solvency. Current employment taxes are 15.3%, with the employer and employee paying an equal share. This proposal would increase this tax to 17.3% and presumably maintain the 50/50 split. 

While the payroll tax approach may be slightly less unpopular than eliminating the payroll tax cap, by itself it doesn’t create full solvency (Remember, we need to reach 100% to sustain the program another 75 years.) It would need to be combined with other revenue increases, or cost cuts.

Cut the Benefits

Most retirees and pre-retirees I talk with suspect that at some point Social Security monthly benefits will be cut. This would be highly politically unpopular. Far too many individuals rely on Social Security to a higher degree than was originally planned, so a straight up reduction of monthly benefits (Sorry Mr. and Mrs. Retiree, your $3,000 monthly benefit is now only $2,000) would cause major problems–economically and politically. 

Rekenthaler explores some more practical approaches to benefit reduction. One of my favorites (or least unfavorable, I should say), and which alone would restore solvency to 65% is to cut the cost of living adjustment (COLA) by 1% each year. 

The COLA adjustment increases Social Security benefits by a certain rate tied to the previous years’ inflation rate. For example, with inflation through the roof in 2022, Social Security benefits (both paid and not yet paid) increased a whopping 8.7%. A 1% COLA Social Security reduction would mean benefits increased by 7.7% instead. If inflation for 2023 is 3.5%, then Social Security benefits would go up by 2.5% in 2024. 

The reason I like this approach so much is because, as Rekenthaler also argues, spending tends to decrease over time in retirement. When I build a financial plan for a client I assume spending over the course of retirement will be about 80% of pre-retirement spending levels, but in many cases retirees are shown to spend as low as 50% to 60% of pre-retirement spending levels. If retirement spending levels decrease, you can argue that COLA can decrease as well.

My Take

While Rekenthaler argues for a combination of revenue increases and benefit reductions to fix Social Security, I’d lean toward more cost cutting. I would argue for a 1% COLA reduction and increasing the full retirement age from 67 to 68, and the minimum retirement age from 62 to 63 or 64. With Americans living longer, I believe we can be in a position to work a bit longer too. Based on data in the article, this would put program solvency to about 99%.

Furthermore, as with many government organizations, there is likely a substantial amount of organizational bloat, inefficient redundancies, and old IT infrastructure that can be addressed. In addition, Social Security is grossly over complicated, requiring an army of Social Security agents to staff call centers, field offices, and update policy details. Simplifying some key aspects would reduce costs and further stave off insolvency. 

In short, I don’t think Social Security is going anywhere and is fixable, but it will look different in the next decade. There are reasonable approaches to shore up the program, keeping it a reliable retirement income stream for decades to come.