Social security is financially on shaky ground. In the coming years, the program expects to owe more in benefits than it takes in as baby boomers leave the workforce, shrinking its primary source of income — payroll taxes.
If lawmakers fail to pump more money into Social Security, the program may have to cut benefits universally once the trust funds run out of money. And we could be in that situation in a little over a decade.
Lawmakers, of course, don’t want that. So many seniors get most of their income from Social Security. If benefits were cut, this could lead to a massive poverty crisis among the elderly.
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As such, lawmakers have tossed around several ideas that could help bolster Social Security finances. These include raising the full retirement age (the age at which recipients can claim their monthly benefits in full), raising the wage cap for Social Security taxes, and raising the Social Security tax rate itself.
A less popular solution has also been introduced into the mix. It’s called income testing, and it could go a long way toward making Social Security more solvent. But it is also an extremely controversial concept that could leave higher incomes out in the cold.
How means testing for social security might work
Currently, entitlement to social security does not depend on pension income. If you qualify for a certain benefit based on your earnings, that is the benefit you are entitled to as a senior. It doesn’t matter if your annual income at the time of your Social Security claim is $20,000 or $2 million.
Means testing would try to change that. Resource testing looks at the income of Social Security recipients to determine whether they are entitled to benefits — and deny benefits to higher earners.
As an arbitrary example, lawmakers may decide that someone who earns more than $250,000 a year in retirement is not eligible for Social Security at all. Or there could be a phase-out, where you can claim your full Social Security benefits as long as your income doesn’t exceed $150,000, but benefits are reduced incrementally from there until they’re reduced to $0.
The logic behind means that testing makes sense to some extent. A senior with an annual income of $4 million probably doesn’t need his monthly Social Security check to get by, so why give that person that money when the program is running low?
But the problem is that all employees pay into Social Security during their careers with the promise of receiving monthly benefits later. And changing that story isn’t apt to sit well with many people.
It’s also easy to argue that simply testing isn’t fair. Let’s say someone paid into Social Security during their career when their income wasn’t that high, sacrificing money they needed at the time. If that person earns money later in life, they probably won’t receive benefits despite that sacrifice.
That’s why taking Social Security benefits away from the wealthy is far from the most talked about solution to the program’s financial problems. But it is an option introduced in the past, so we can’t assume it’s definitely off the table. That’s something higher earners — or those expecting a high income when they retire — should at least be aware of.
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