Acting now to address Social Security’s financial woes would reduce the impacts of changes on beneficiaries, allow changes to be gradually phased in, and would also give Americans more time to plan for any changes affecting their retirement security, the U.S. Government Accountability Office says in a new report released July 31.
In a GAO WatchBlog posted on Aug. 6, Kris Nguyen, a Director in GAO’s Education, Workforce, and Income Security team, talks about the importance of early action.
“The bottom line is that early action reduces the stress of change. And based on our analysis of the Trustees report, each year of inaction increases the magnitude of the changes that will be needed to ensure Social Security can continue to pay for full benefits over the long term,” Nguyen said. “Earlier action, as well as more certainty about future changes, would give our citizens the ability to factor in these changes to their retirement planning.”
The new report—the last of a three-part series—focuses on a range of reform options based on proposals introduced in Congress or suggested by Social Security experts and outlines for Congress four categories of options, focusing on their financial implications.
GAO, an independent, non-partisan agency that works for Congress to examine how taxpayer dollars are spent, does not advocate for one action over another, saying that decision should be made by policymakers.
The underlying problem
Social Security has paid out more money than it collects (in taxes) since 2010. As has been well documented, Trustees that oversee Social Security’s finances say that the program’s reserve funds will be exhausted in less than 10 years if no action is taken, meaning that retirees would receive only about 79% of their scheduled benefits as early as 2033.
The shortfall is driven by an aging population, longer life expectancies, and a declining worker-to-beneficiary ratio, putting increasing strain on the system’s financial sustainability. Without legislative action to address the imbalance between revenues and benefits, Social Security faces significant challenges in maintaining full benefit payments in the long term.
4 categories of options
Here’s a closer look at the four categories of reform options in the report.
Options to reduce program costs: Policymakers could reduce program costs by changing eligibility and benefit amounts. These changes could reduce current or future benefit amounts for everyone or for certain groups. Thirteen different options are included in this category (see the full report for complete details). Among them:
• Reducing benefits for all beneficiaries or for specified groups.
• Reduce benefits for spouses, widowers and/or children of workers.
• Reducing COLAs by indexing benefits to a “chained CPI” and other ways to reduce or even eliminate COLAs for certain groups of beneficiaries, such as those with higher incomes.
• Reducing the replacement percentages used to calculate monthly benefits.
• Shifting to a flat benefit amount at a level below the current average benefit amount.
• Further reducing benefits for early retirement.
• Increasing the full retirement age (currently 67 for those born in 1960 or later).
Options to increase program revenues: Options for increasing the amount of payroll tax revenues that the program collects, as well as others that would increase the amount of resources available by using revenues from outside of Social Security’s existing revenue sources. Six options are listed in this category. Among them:
• Increasing the payroll tax rate, currently 6.2% for the employer and 6.2% for the employee or 12.4% total.
• Raising or eliminating the cap on taxable earnings ($168,600 in 2024).
• Increasing taxation of Social Security benefits.
• Using general revenues or a new revenue stream.
• Eliminating the retirement earnings test.
Options with mixed or uncertain effects: Such as extending Social Security coverage to currently uncovered state and local government employees, which would initially boost revenues but ultimately worsen the program’s long-term financial outlook. Five options are listed in this category, including:
• Investing trust fund assets in private-sector securities.
• Allowing individuals to invest a portion of their payroll taxes in private securities.
• Modifying the relayed retirement credit calculation.
• Covering additional state and local government employees.
Options that worsen finances to pursue other goals: Policymakers may look to reduce the impacts of reforms on particularly vulnerable beneficiaries. They may also seek to modernize aspects of Social Security by increasing benefits for some individuals to respond to changes in society. These options could achieve important nonfinancial goals but could also make it harder to solve Social Security’s financial challenges. The report lists 11 different options in this category, including:
• Increasing benefits for specified groups or all beneficiaries.
• Raise the early retirement age.
• Index benefits to the Consumer Price Index for the Elderly (CPI-E).
• Increasing the COLA for certain groups.
• Reduce or eliminate the taxation of benefits.
• Exempting certain workers from the payroll tax.
• Reducing the payroll tax rate.
SEE ALSO:
• Where the Candidates Stand on Social Security
• Social Security Buying Power Down 20% Since 2010
• Trump Calls for Elimination of Social Security Tax