42% of working Americans surveyed by Pew Research in December of 2018 said they fear they would receive zero benefits from Social Security.
Social Security Trustees announced at the end of August this year that in 2033 unless changes are made, Social Security benefits would drop to 75% of their promised initial amounts.
Having watched the recent debt limit talks and how Congress handled that, I’m not very encouraged that the politicians in Washington will do anything to fix Social Security any time soon. There are three Presidential elections and six Congressional elections before 2033. So expect to hear about it in passing in 2024. It will be a bigger deal in 2028 and, by 2032, a keystone issue if it has not been addressed by then.
I want to share five ways Social Security is fixable.
Realistically, the fix will be a combination of several fixes. Some of these might even be included, but likely any solution will be multifaceted as there is no simple answer. However, all you have to do is look back at Ronald Reagan’s changes in April of 1983, which will be entirely in place next year after 40 years.
1) Raise the wage base
This one happens every year, but an inflation calculation dictates this one. In 2021 the wage base was $142,800, and in 2022 it is projected to be $147,000. Suppose you have ever reviewed your earnings history or noticed that your withholding changes at the end of the year, the wage base is usually the culprit. FICA taxes are in two parts: Social Security at 6.2% and Medicare at 1.45%. Social Security is only paid until you reach the wage base. Medicare is paid on all earnings.
The solution would be to raise the wage base significantly – to say $500,000, which means that 6.2% on everything between $147,000 and $500,000 (or whatever the number goes to) would be taxed. That would bring three times as much money into the system. If this happens, it would be because of the second way to fix Social Security.
2) Change the PIA Formula
A formula figures out your Primary Insurance Amount. In 2022, the first $1,024 you make in monthly income is replaced at 90%. Then from $1,024 to $6,172, your income is replaced at 32%. From $6,172 up to $12,250, which is equivalent to the annual wage base of $147,000, it is replaced at 15%. Social Security could lower the rate at which they replace your income.
The Monthly Income is calculated by your AMIE (Average Monthly Indexed Earnings), which is the average monthly earnings for the highest 35 years of your working career. The point at which the percentage replacement changes is called a bend point. The third way to fix Social Security would be to add a 3rd Bend Point.
3) Add a 3rd Bend Point
This idea is a bit of a combination of the first two ideas. The concept here will be if the wage base is increased, instead of replacing income at 15% up to the current wage base of $12,250, add a 3rd bend point and of 5% until the monthly income hits $41,667. This change would give people with significant incomes a bigger Social Security payment. In return, they would pay more into the system, helping it become solvent.
4) Raise the claiming age
The age when you can first claim Social Security benefits is 62. Starting in 2022, everyone turning 62 will have a full retirement age of 67. The age at which your payment stops growing for everyone is age 70. Increasing the claiming age by two years, so the earliest you could collect is 64, would delay people claiming while keeping the formula the same. This change would reduce the amount of money Social Security would pay out during a retiree’s lifetime. The flip side of this idea would be idea number five.
5) Increase the early claiming penalties and decrease the delayed retirement credits
Currently, if you claim your benefit early, there is a reduction in your payment in the first 36 months. After that, your monthly payment is reduced by 5/9th of a percent. Anything over 36 months is reduced by 5/12th of a percent for each additional month early. The fix here would be to increase the penalty for claiming early. For instance, you could potentially claim early at 5/9th of a percent for any of the 60 months. The other possibility is to reduce the delayed retirement credits. Instead of the current 2/3rd of a percent increase per month for each month, you wait, and lower that percentage to entice people not to delay and reduce lifetime benefits.
To end on a positive note, I believe Social Security will be there for retirees. However, it may not be what you see today. Make no mistake, fixing Social Security does not mean keeping it the same. On the contrary, fixing Social Security means higher taxes for some, and in many cases, those same people may receive less or have to wait longer.
Fixing Social Security will be unpopular and a minefield for the politicians in office, but a 24% decrease in benefits will surely be less popular if not addressed. From a cynical standpoint, the most significant problem against real reform is that many people who could start the ball running will not be in office in 2033 and have an election or two before then. In the climate in Washington today, why tackle a problematic issue when you can kick it down the road? Sadly the answer is you do not.
Social Security was never meant to make up half of someone’s retirement income as it does now for almost 50% of American seniors. The younger you are, the more time you have to take responsibility for your future and prioritize retirement savings.