Social Security advocates breathed a sigh of relief earlier this year when President Barack Obama backed off on a proposal to cut benefits for the popular senior citizen program.
"With the middle class struggling and more people living in poverty than ever before, we cannot afford to make life even more difficult for seniors and some of the most vulnerable people in America," U.S. Sen. Bernie Sanders, I-Vt., said in a statement following the release of Obama's budget proposal in March.
In an effort to reach a budget compromise with Republicans, Obama had proposed implementing a new "chained" consumer price index to formulate cost-of-living adjustments. A chained-CPI means that the average Social Security recipient who retires at age 65 would get $658 less a year at age 75 and would get over $1,100 less a year at age 85 than under current law, Sanders explains. It also would mean substantial cuts to the Veterans Administration benefits of more than 3.2 million veterans. Veterans who started receiving VA disability benefits at age 30 would have their benefits reduced by $1,425 at age 45, $2,341 at age 55 and $3,231 at age 65.
While we don't support cutting benefits to our most vulnerable citizens, the issue of what to do about beefing up the Social Security Trust Fund for future retirees remains unresolved.
First, we need to dispel a common myth - that Social Security won't be around much longer.
"That thinking couldn't be more wrong," according to a recent op-ed piece by Steve Vernon in CBS MoneyWatch. "Social Security is one of the most popular government programs around, as our political leaders well understand - Social Security will be around as long as democracy reigns, in other words."
As Vernon explains, under current law the Social Security Trust Fund could run bone dry and retirees still would get most of their benefits. That's because the Trust Fund is only a supplemental source of funding for Social Security. Most of the Social Security retirement and disability benefits are funded from taxes collected each pay period from current workers and their employers.
Until 2010, FICA taxes were more than enough to pay for the Social Security benefits of retirees and beneficiaries each year. The excess money was added to the Trust Fund every year. Starting in 2010, however, FICA taxes weren't sufficient to fund that year's benefit payments, and supplemental monies from the Trust Fund was needed. For example, for 2014 Social Security projects it will pay $863.8 billion in benefit payments, but collect $769.5 billion in FICA taxes, plus an additional $30.1 billion in income taxes on Social Security benefits.
The Social Security Trust Fund has a surplus today of $2.8 trillion. This sum, plus revenue that comes in every day, can pay out every benefit owed to every eligible American for the next 20 years, Sanders notes. In 2033, unless Congress acts, Social Security will be able to pay out only 75 percent of benefits owed.
"While that certainly wouldn't be good news, benefits wouldn't go anywhere near zero," Vernon wrote.
Meanwhile, Vernon says Social Security's long-term funding deficit can be reduced or eliminated with some combination of tax increases or benefit cuts phased in over time. For example, the long-term deficit could be eliminated without raising taxes if benefits were immediately reduced by 16.5 percent in aggregate. Congress could reduce benefits by increasing the retirement age, reducing the amount of monthly benefits, slowing increases in the cost of living adjustment, or some combination of these methods.
The long-term deficit also could be eliminated without reducing benefits if taxes were immediately increased by 2.66 percent of total covered payroll. Workers currently pay 6.2 percent of their earnings, up to $113,700, to fund retirement, survivors and disability benefits; the employer pays an equal amount. Congress could increase the FICA tax rate, increasing the limit on the amount of compensation that's subject to taxes, or some combination of the two.
Sanders has advocated for years that the fairest approach to making Social Security fully solvent for the next 50 years is to lift the cap on taxable income, and apply the Social Security payroll tax on income above $250,000.
"Right now, someone who earns $113,700 a year pays the same amount in Social Security taxes as a billionaire. This makes no sense," Sanders argues.
He says applying the Social Security payroll tax on income above $250,000 would only impact the wealthiest 1.3 percent of wage earners. In other words, 98.7 percent of wage earners in the United States would not see their taxes go up by one dime under this plan.
We're inclined to agree with Sanders that raising FICA taxes on the wealthiest 1 percent would be better than cutting benefits for the neediest among us. Unfortunately, given the political climate in Washington, D.C., these days, that may not be possible.
"A combination of small tax increases and means-tested benefit cuts will be the most palatable solution," Vernon wrote.
That seems more a more realistic goal. But then, when Vernon adds, "that could certainly be achieved by a Congress that has the courage to lead us in the direction we need to go," we have to wonder how realistic he is being in his assessment of this issue and possible solutions. To which Congress is he referring, exactly?
It's more likely the issue of shoring up the Social Security Trust Fund will be tossed around like a political hot potato until we reach crisis mode. That would truly be unfortunately because Social Security has proven to be the most successful and reliable federal program in modern American history.
For 78 years, Social Security has succeeded in keeping millions of senior citizens, widows, and the disabled out of poverty. Before Social Security, about half of our senior citizens lived in poverty. Today, while still too high, fewer than 10 percent of seniors live in poverty, and more than 57 million Americans receive Social Security benefits.
That's a success rate we need to make sure Social Security is around for future generations.