More than 65 million people in the United States currently receive Social Security benefits, and nearly 90% of retired workers rely on those benefits to some degree, according to pollster Gallup. But the Social Security program is also an important part of the retirement planning process for prospective retirees and their spouses.
Unfortunately, the program is in dire need of reform. Here are three of the most pressing Social Security issues for seniors — and a recommendation for solving them.
1. The OASI Trust Fund will be exhausted by 2034
The Old Age and Survivor Insurance Trust Fund (OASI) — the source of Social Security benefits paid to retirees and survivors — will dry up in 2034, according to a recent report from the Board of Trustees. After that, the program will be completely dependent on payroll taxes, but those revenues will only cover 77% of the planned benefits.
The problem actually started when birth rates skyrocketed after World War II, a period known as the baby boom. But since then, birth rates have fallen while life expectancy has risen, pushing the worker-to-beneficiary ratio from 41.9 in 1945 to 2.8 in 2021. Worse, that figure will continue to fall in the coming years, according to the Board of Trustees. , which means that the number of employees who pay taxes to the Social Security program decreases in proportion to the number of seniors receiving monthly benefits. It is clear that this trend is unsustainable.
One possible solution to the Social Security program is to get additional funding, and the most obvious way to do that is by increasing Social Security tax revenues. Currently, employees pay 6.2% Social Security tax on their first $147,000 in earnings per year (and employers match that figure for a combined total of 12.4%), while all wages are not taxed after that. With that in mind, increasing the maximum taxable profit or removing the limit altogether would theoretically increase the solvency of the OASI Trust Fund.
President Joe Biden has discussed such a solution. His plan would apply the Social Security payroll tax to all income above $400,000, meaning it would affect about 2% of Americans. In addition, a handful of Democratic politicians co-sponsored a bill known as the Social Security Expansion Act, which would expand Social Security payroll taxes to all income above $250,000.
2. Social Security benefits have lagged behind inflation
From January 2000 to March 2022, Social Security benefits lost 40% of their purchasing power, according to a recent survey by The Senior Citizens League. In other words, for every $100 of goods and services a retiree bought in 2000 with their monthly allowance, they can only buy $60 today. That problem stems from the way Cost of Living Adjustments (COLAs) are calculated.
Social Security COLAs are designed to protect the purchasing power of benefits by ensuring that retirees increase each month at the same rate as inflation. But the Social Security Administration currently measures inflation using the consumer price index for urban wage earners and white-collar workers (CPI-W), a measure based on the spending patterns of office workers and other wage earners. Those individuals tend to spend more on recreation, education, and transportation, while seniors spend more on medical care, prescription drugs, and housing. That makes the CPI-W a poor measure of inflation for seniors because many of the major spending categories are underemphasized.
To solve that problem, many experts have suggested using the consumer price index for the elderly (CPI-E) instead of the CPI-W. The CPI-E tracks purchases made by individuals age 62 and older, theoretically making it a more accurate measure of inflation for the elderly population.
3. More Seniors Pay Taxes on Social Security Benefits
The federal government began taxing Social Security benefits in 1984, although very few seniors met the income thresholds when the law was first passed. In fact, less than 10% of beneficiaries actually paid federal income tax on their Social Security check at the time. Benefits have been adjusted for inflation every year since then, but Congress has never adjusted Social Security income thresholds subject to taxation. As a result, about 50% of beneficiaries now pay federal income tax on some of their benefits, according to the Congressional Research Service.
The solution to that problem is simple: income limits must be adjusted in line with inflation. Otherwise, the number of seniors paying tax on their benefits will continue to rise each year.
A final recommendation for current beneficiaries and future retirees
More than 70% of Americans worry that the Social Security program will run out of money in their lifetime, but most experts disagree. The wheels of change may turn slowly in Washington, but Congress will ultimately have to address the issues discussed in this article.
That said, retirees should always stay on top of the latest news, and prospective retirees should take steps to minimize their dependence on Social Security. Financial planning may not be exciting, but if you save diligently and contribute regularly to one or more retirement accounts, chances are your golden years will be more enjoyable.