According to CNN, Social Security’s trust funds are projected to run dry in 2034, which could reduce benefit amounts to just 80% of current levels. Reforms must be made to shore up Social Security and ensure the program’s longevity.
However, some of the proposals to improve the program aren’t popular and could negatively affect future retirees. Here’s what you need to know about potential changes to Social Security that could be on the horizon so you can financially prepare.
1. Higher Retirement Age
One potential way to resolve Social Security’s insolvency is to raise the current retirement age to reflect increases in life expectancy. According to CNN, the Republican Study Committee has suggested 70 as the full retirement age for those born in 1978 or after. If this policy is implemented, Americans age 46 or younger may need to work longer or save more for retirement so they can live on their nest egg until Social Security kicks in.
As you can imagine, this is an unpopular reform. Critics say that it would hurt blue-collar workers with physical jobs the most because it’s unrealistic to expect them to work until 70.
2. Means-Testing
Social Security was originally designed to address the problem of elderly poverty. To realign the program with its original intent, experts have suggested means-testing the benefits. Retirees with more assets who don’t rely on the benefits will have their monthly payments adjusted downward, which will help reduce the strain on Social Security’s trusts.
After decades of paying into the system, it may seem unfair that some taxpayers will receive lower payments. Responsible savers who set aside money for retirement may also feel like they’re being punished for their diligence.
3. Increased Payroll Tax Rate
Social Security is financed through a 12.4% payroll tax on employees’ wages, half of which is paid by their employers. However, self-employed individuals bear the brunt of the entire 12.4% payroll tax themselves. So proposals to raise the tax rate would hurt contractors the most, reducing their take-home pay and ability to save.
It’s unclear how much the payroll tax rate would be increased. Proposals range from a 2% to 3.6% jump, which could pinch workers financially.
4. Lift the Wage Cap
Another policy that could be implemented to shore up Social Security is lifting the wage cap. Currently, payroll tax is only applied to the first $168,600 of a person’s annual wages. Bernie Sanders and Elizabeth Warren propose raising this limit and levying a lax on business and investment income. Their suggested reforms could extend the program’s solvency for 75 years.
Although the idea of raising taxes is never popular, it may be necessary to ensure the longevity of Social Security.
5. Raise the Minimum Benefit
With the insolvency of Social Security on the horizon, it seems counterintuitive to raise payments. However, many retirees who live solely on their benefits struggle to pay their bills. To address this problem, Democrats have suggested increasing the minimum payment to $1,341 per month for beneficiaries who worked 30 years.
However, it’s unlikely that this reform would receive bipartisan support. Only 59% of Republicans approve of this proposal, which would further burden a financially struggling Social Security system.
6. A New Investment Fund
Another idea that’s been floated to increase Social Security’s revenue is creating a new fund, which would be invested in the stock market. The current trust funds are held in cash and bonds, yielding lower returns. Investing in the stock market would help the program keep up with inflation and partially address the upcoming shortfall.
However, this proposal would add extra risk to the system because the stock market can be volatile.
7. Lower Cost of Living Adjustments
Making changes to the way cost of living adjustments are calculated could also reduce the financial strain on Social Security. Instead of using the Consumer Price Index to determine annual adjustments, the Chained CPI would be substituted. It more accurately reflects the cost of living by taking into account the changes consumers make to their lifestyles as prices rise, such as buying cheaper cuts of meat to save money.
However, many seniors who rely on Social Security as their main source of income struggle to pay their bills. The concern is that reducing annual cost of living adjustments could hurt this group of seniors.
8. Increase Age of Eligibility for Early Retirement
If retirees are willing to accept a reduced benefit, they can start receiving Social Security payments as early as age 62. Increasing the age of eligibility could help reduce the financial burden on the Social Security trusts.
However, low-income individuals who work physically demanding jobs are more likely to claim benefits early. Because of the physical nature of their jobs, they may not be able to work longer. As a result, this may not be the right way to resolve the financial shortfall.
9. Reduce Administrative Funding
Reducing Social Security’s operating costs could help improve the program’s financial outlook. However, adequate funding is essential for administering Social Security benefits efficiently and accurately, ensuring timely payments to retirees and beneficiaries. Cuts to administrative funding could lead to longer wait times for services, delays in benefit processing, and increased frustration for retirees navigating the system, so it’s probably not the right move.
10. Reduce Disability Benefits
Proposals to reform disability benefits may aim to streamline the application process, discourage fraudulent claims, and encourage return-to-work initiatives. However, implementing changes like stricter eligibility requirements or benefit cuts could leave disabled individuals without essential financial support, exacerbating their economic hardship and health challenges.
11. Privatize Social Security
Privatizing the Social Security system would allow workers to invest part of all of their payroll tax contributions in self-directed retirement accounts. Although this proposal could improve returns and payouts, it also increases investment risk and disadvantages Americans who are less financially savvy. Critics also say that the cost of switching to this system would be high.
12. Reduce Spousal and Survivor Benefits
Making changes to spousal and survivor benefits is another potential avenue to improve Social Security’s financial prospects. Modifications may include reducing benefits for non-working or lower-earning spouses, adjusting eligibility criteria, or changing benefit calculation methods.
If implemented, these changes could impact the financial security of widows, widowers, and spouses who have taken time out of the workforce for caregiving responsibilities. Although these types of reforms are proposed much less frequently than others, it’s still something to be aware of.
Stay Informed About Potential Changes
So far, lawmakers haven’t reached an agreement about how to resolve Social Security’s financial insolvency. As new developments and proposals emerge, it’s important to inform yourself about potential changes that could be on the horizon. Staying updated on possible reforms can help you adjust your retirement plans to ensure financial security in your golden years.
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