WASHINGTON (AP) – New projections show the United State's federal Social Security program will suffer a $5.3 trillion shortfall over the next 75 years. However, a new report also found some modest tweaks that could erase the gap.
Social Security is financed by a 6.2 percent payroll tax on wages below $106,800 a year. Workers and employers each pay a 6.2 percent tax on employees' wages. Currently, 53 million Americans get Social Security benefits averaging $1,067 a month. In 75 years, 122 million – or one-fourth of the population – will be drawing benefits.
According to a new Congressional report, the massive gap could be erased with only modest changes to payroll taxes and benefits.
Some of the options are politically dangerous, such as increasing payroll taxes or reducing annual cost-of-living increases for Social Security recipients. Others, such as gradually raising the age when retirees qualify for full benefits, wouldn't be felt for years but would affect millions.
Many wouldn't affect current recipients, according to the report by the Senate Special Committee on Aging. Senator Herb Kohl, chairman of the committee, said small "tweaks" are all that is needed to bolster Social Security's finances for future generations of retirees.
"Modest changes can be made over time that will keep the program in surplus," said Senator Herb Kohl, D-Wis., told The Associated Press. "They are not draconian, as the report points out, and they can be done and will be done."
The committee's report, obtained by the Associated Press, lays out options for fixing Social Security, but doesn't endorse any of them.
Kohl said lawmakers will probably combine several options to ease their impact. No action is expected this year, with midterm congressional elections looming in November. Lawmakers have said they hope to take up the issue next year.
Social Security is financed by a 6.2 percent payroll tax on wages below $106,800. The tax is paid by workers and matched by employers. Older Americans can apply for early retirement benefits, starting at age 62. They qualify for full benefits if they wait until they turn 66, a threshold that is gradually increasing to 67 for people born in 1960 or later.
Some of the options proposed by the Senate Special Committee on Aging include gradually raising the age when full benefits kick in, increasing payroll taxes or reducing annual cost-of-living increases. The Senate panel's report will be presented to President Barack Obama's deficit reduction commission, which is expected to review all entitlement programs in the search for savings.
Here's a full rundown of the Senate Special Committee on Aging's proposed changes:
- Immediately increase payroll taxes for workers and employers by 1.1 percentage points each, to 7.3 percent. This move is projected to eliminate 104 percent of the gap.
- Increase payroll taxes for workers and employers by 1 percentage point starting in 2022, and an additional percentage point starting in 2052 (addressing 103 percent of the gap).
- Increase payroll taxes for workers and employers by 1/20th of 1 percentage point each year for 20 years (eliminating 69 percent of the gap).
- Tax all wages including those above the current cap of $106,800, without providing additional benefits to high earners (eliminating 116 percent of the gap).
- Tax all wages including those above the current cap of $106,800, while providing increased benefits to high earners (95 percent of the gap).
- Impose a new 5 percent tax on couples making more than $250,000 and individuals making more than $125,000 (62 percent).
- Reduce the annual cost-of-living increase in Social Security payments by 1 percentage point each year (78 percent).
- Gradually increase the age when retirees qualify for full benefits from 67 to 68 (23 percent of the gap).
- Gradually increase the age when retirees qualify for full benefits from 67 to 70 (31 percent)
- Reduce Social Security payments by 5 percent for new beneficiaries in 2010 and later (30 percent of the gap).
Many of the options sound simple, but most would have widespread ramifications, said Barbara Kennelly, president and CEO of the National Committee to Preserve Social Security and Medicare.
"If you raise the retirement age and you don't do anything about the pension law or anything about retraining, and there's been no discussion on that, where are the jobs?" asked Kennelly, a former Democratic congresswoman from Connecticut. "It's not so simple."
One expert cautioned that adjustments designed to fully fund Social Security for only 75 years will almost certainly have to be revisited well before then.
Here's why: In 15 or 20 years, the Social Security trustees will be looking at a new 75-year window, one that includes future shortfalls beyond the current 75-year horizon. Those shortfalls will have to be addressed years in advance to avoid dramatic tax increases or significant benefit cuts, said Kent Smetters, a professor at the University of Pennsylvania's Wharton business school.
"If you only fix it for 75 years at a time," Smetters said, "the same problem suddenly reappears every 15 to 20 years."
On its current path, Social Security is projected to run out of budgeted money by 2037, largely because of aging baby boomers reaching retirement. For the first time since the 1980s, Social Security will pay out more money in benefits this year than it collects in payroll taxes. The longer action is delayed, the harder it will get to address the program's finances.
The Social Security trust funds have built up a $2.5 trillion surplus over the past 25 years. However, the federal government has borrowed that money over the years to spend on other programs. The government must now start borrowing money from public debt markets – adding to annual budget deficits – to repay Social Security.