Retirement Solutions

With the retirement of the baby boomers and lengthening life expectancies, programs critical to older Americans will come under significant strain in coming decades.

While the federal government provides major tax advantages to encourage employment-based retirement benefits and individual retirement savings, Social Security is the primary source of retirement support provided by the federal government and the largest program in the budget. It is a vital lifeline to millions of Americans, but without action, it will lack sufficient resources to pay for all of the benefits promised under current law. Almost every American worker pays a dedicated payroll tax, which entitles them to benefits when they retire or become disabled. But as the population ages, fewer workers will be paying taxes to support each Social Security beneficiary, thereby endangering the program’s finances.

As the population ages, fewer workers will be paying taxes to support each Social Security beneficiary

Social Security's Trustees project that the Old-Age and Survivors Insurance (OASI) trust fund will be depleted in 2034. At that point, 74 million beneficiaries could face across-the-board benefit cuts of 23 percent if policymakers fail to act.

Social Security will run a cumulative cash deficit of $2.9 trillion between now and 2034

Policy Options for Social Security (OASI)

Many policy solutions exist for improving the financial outlook of Social Security’s retirement program, including increasing payroll taxes, raising the full retirement age, reducing initial benefits, and adjusting benefits after retirement. Proposals to put Social Security’s finances on a long-term sustainable footing include:

Options to increase Social Security’s payroll tax revenues

  • Raise the payroll tax rate from its current level of 12.4 percent (half paid by employees and half by employers) on wage earnings subject to the tax. In 2018, earnings up to $128,400 were taxed
  • Lift the cap on earnings subject to tax.

Options to increase the retirement age and index it to increases in longevity

  • Full retirement age varies; it was 66 years and 4 months for those who were eligible to retire in 2018 and is slated to rise to 67 years old for those born in 1960 or later. Some propose increasing the retirement age above age 67 for younger cohorts to account for future gains in average longevity.

Options to adjust benefits

  • Change the amount that retirees can receive when they first apply for benefits. Many proposals combine a reduction in benefits for high earners with an increase in benefits for lower earners. (This is known as "progressive price indexing.")
  • Slow the growth of retirees’ benefits over time by changing the cost-of-living index. Many economists believe that Social Security currently uses an index that overstates inflation, so benefits grow faster than the true cost of living. They propose replacing the current index with chained-CPI, which is a more accurate measure of inflation. (This change would also apply to other inflation-indexed federal retirement programs and tax provisions.)

Considerations

Policymakers face the challenge of preserving the retirement system in a fiscally sustainable way that would strengthen support for those who need it the most while recognizing the limited ability of retirees and near retirees to adjust to major disruptions in their financial situations.

For that reason, proposals often exempt workers ages 55 and above from any reduction in benefits and gradually phase in reductions for younger people in order to give them time to accumulate more resources for retirement through pension plans or other savings. Importantly, if policymakers act sooner rather than later, they will have more reasonable options, which can be gradually implemented to reduce their impact on individuals. Conversely, every year of delay and inaction limits options and makes reform more difficult.

Understanding the importance of the Social Security program for low-income Americans is a critical aspect of reforming the program in a fair and equitable way. In 2014, Social Security provided more than 80 percent of retirement income to those in the bottom two quintiles of retirement beneficiaries (seniors with $23,592 or less of total income).

Low-income seniors rely on Social Security benefits for a major share of their retirement income

Additional Social Security reform options can be found on the Social Security or CBO websites.

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