Social Security For Dummies
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Social Security faces a shortfall. To pay benefits, Social Security will increasingly rely on its trust funds because revenues from the payroll tax aren’t sufficient. After about 2035, when the trust funds are exhausted, the program is projected to have enough income to cover about 80 percent of promised benefits. That means the country faces choices about how to close the gap.

future of Social Security © Lane V. Erickson /

Social Security issues aren’t limited to its solvency, however. Changes in lifestyle since the 1930s have prompted other ideas to make the program more fair and helpful in the 21st century.

This article outlines ten major policy options the nation may consider for the future of Social Security. The menu of changes is potentially larger. But these are among the most prominent approaches that have been debated for years by experts of varying political views. Millions of people will be affected by how these issues play out.

Whether to Increase the Earnings Base

You make payroll tax contributions to Social Security on earnings up to a limit ($137,700 in 2020). This cap is known variously as the wage base, contribution and benefit base, and taxable earnings base. It has historically served as a limit on the payroll taxes that you and your employer each pay to the program.

Most workers (more than nine out of ten) earn less than the cap. But in recent decades, a small percentage of workers has been receiving a growing share of total U.S. earnings. If you think about all earnings as a pie, the slice that goes untaxed for Social Security has been getting bigger. Raising the earnings base is a way to make the pie look more like it used to and boost revenues for Social Security.

For example, increasing the earnings base such that 90 percent of earnings would be subject to the payroll tax would reduce Social Security’s shortfall by 26 percent (if higher earners got somewhat higher benefits) or by 35 percent (if additional taxed earnings weren’t included in the benefit calculation), according to 2019 projections by the Social Security Administration (SSA). To bring in more or less money, the earnings base could be increased by a higher or lower amount.

Eliminating the cap altogether is a way to greatly decrease the shortfall, but such a measure could weaken the link between contributions and benefits if the additional taxed earnings aren’t used in the benefit calculation.

The argument against increasing the earnings base is that high earners already get less of a return on their contributions than lower-income workers get, because Social Security benefits are progressive by design. Also, raising the earnings base amounts to a big tax hike on high earners. But supporters say an increase goes a long way toward fixing the problem, and the burden on high earners wouldn’t be onerous.

Whether to Cover More Workers

You and the people you know probably are covered by Social Security. Most workers are. The largest group outside the system is about 25 percent of state and local government employees who rely on separate pension systems and don’t pay Social Security taxes. Bringing newly hired state and local government workers into Social Security would raise enough revenue to solve about 6 percent of the long-term shortfall.

State and local governments may oppose such a measure since it could adversely affect the financial stability of their pension systems. The federal government would have to provide a large cash infusion to those pensions if Social Security siphoned off new public employees who aren’t now covered.

Such a proposal, however, could bolster Social Security’s finances and simplify administration of benefits. That’s because the way the program is set up today, Social Security must adjust payments for former government workers who spent part of their working lives contributing to public pension plans but not to Social Security.

In addition, newly covered public employees would benefit from disability and survivor insurance that is either weak or nonexistent in some state and local plans.

Whether to Raise Taxes

Raising Social Security payroll taxes is one way to address the financial shortfall head-on. Even small increases in tax rates go a long way toward shoring up the program’s finances over time.

For most recent years, wage earners have paid a Social Security tax of 6.2 percent up to a certain threshold of income ($137,700 in 2020). Employers have paid the same rate as wage earners. The self-employed have paid 12.4 percent (both the employer and employee share). Raising the Social Security payroll tax from 6.2 percent to 6.5 percent would eliminate about 20 percent of the shortfall; raising it to 7.2 percent could close just more than half the gap. A higher increase would have a bigger impact, and a smaller increase would do less. Any increase could be phased in.

This approach would eliminate much of the problem, and it polls well with the public. But it also raises questions. Critics voice concerns about the economic impact of higher payroll taxes and the possibility that employers may respond to a higher tax by cutting other payroll costs, such as jobs.

Tax revenues for Social Security could be raised in other ways, such as by dedicating revenue from the estate tax or increasing income taxation of Social Security benefits. Neither, however, would generate enough revenue to make a significant dent in the problem.

Another approach would be to tax contributions to all salary reduction plans (arrangements in which you’re able to divert some of your pretax income to certain areas, such as transit, flexible spending, dependent care, and health-care accounts). Extending the Social Security payroll tax to all such areas could reduce the shortfall by 9 percent (but such a move would hit consumers who use such accounts to help cover necessities).

Whether to Cut Benefits

Benefit cuts are nothing to cheer about, but they would save money. Further, they could be structured in a way that doesn’t hurt current retirees, soon-to-be retirees, and low-income individuals. Any changes could be phased in after a long lead time, giving younger workers years to adjust their plans for the future.

The formula that calculates benefits could be altered in a manner that protects individuals who depend most heavily on benefits, while landing hardest on those who can afford the change. But of course, the fine print would determine the impact. And the more people who are protected, the less savings are achieved. Note: Policymakers usually include some combination of benefit cuts and tax hikes when they devise plans to strengthen Social Security.

Still, a targeted reduction in benefits could undermine the broad public support for Social Security as a program in which everyone pays in and everyone gets benefits. The more cuts fall on the middle class, the more they erode retirement security for people already facing a squeeze. The more cuts fall on high earners, the less support high earners may have for Social Security.

Whether to Modify the Inflation Formula

Social Security benefits are adjusted to keep up with the cost of living. This protection is extremely valuable to beneficiaries and becomes even more so the longer you live. Without the annual cost-of-living adjustment (COLA), the purchasing power of your benefits shrinks over time. Private pensions usually lack this protection.

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is used as the guide in adjusting Social Security benefits to rising prices. One proposal to save money would be to use a different measure known as the chained CPI. The chained CPI builds in the idea that consumers switch their purchases if the price of a particular good goes up too much. The notion is that if the price of ice cream soars, you may switch from eating Fudge Ripple to munching on cookies. If filet mignon is getting too pricey, maybe you’ll reach for pork chops.

The chained CPI rises about 0.3 percentage points less each year than the CPI-W. That means a chained CPI would save the Social Security program a lot of money — reducing the shortfall by about 20 percent because of slower-growing benefits.

Unlike most savings proposals, an index that brings smaller inflation increases would affect current beneficiaries, albeit gradually, as well as future ones. Those receiving benefits for many years would eventually be hit the hardest. For example, you would see your benefit reduced by a bit less than 1.5 percent after 5 years, 3 percent after 10 years, and 6 percent after 20 years under a COLA based on the chained CPI.

Opponents say a chained CPI may not reflect the reality of older consumers. They spend a lot more on health care than young people do, and health care costs are rising fast. Older consumers also may rely on various services that may be hard to substitute for. These reductions would mean a larger benefit cut over time. As a result, some proponents would cushion such reductions with a special boost in benefits for the oldest beneficiaries.

Whether to Raise the Full Retirement Age

The age you can get full Social Security benefits is gradually rising. One proposal to save money is to raise the full retirement age even further.

This proposal saves a lot of money for the system while providing an incentive for people to keep working. Pushing the full retirement age to 68 could reduce the shortfall by about 17 percent. Raising it higher, as some suggest, would save even more. Such increases can be implemented very gradually to protect older workers. Proponents say this approach makes sense in an era of increased longevity. A 65-year-old man, for example, is expected to live on average to 84 — and many will live longer than that.

This issue, however, is more nuanced than some people realize. It’s true that when Social Security was created, a newborn male wasn’t expected to reach 65. But for those who survived to adulthood, many lived into their late 70s and beyond — fewer than today, to be sure, but the gap isn’t as wide as some imagine.

Nor has everyone benefited equally from increases in longevity. Many lower-income, less-educated workers haven’t enjoyed the same gains in life expectancy as their more affluent, more-educated counterparts, and by some gauges have suffered actual declines. Also, a later age for full retirement benefits could prove onerous for older workers with health problems or in physically demanding jobs.

A related proposal would index Social Security benefits to increases in life expectancy (such as by linking the full retirement age to advances in longevity). This would put the Social Security program on sounder footing by providing lower monthly benefits to compensate for the fact that people are generally living longer.

How to Treat Women More Fairly

Social Security was designed with a 1930s-era vision of the family with a male breadwinner and a stay-at-home mom. Of course, many households no longer fit that model. The result is that some of Social Security’s benefit rules raise issues of fairness — issues that often affect women.

For example, Social Security provides a nonworking spouse a benefit of up to 50 percent of the breadwinner’s benefit. Yet a working, nonmarried woman potentially gets a smaller benefit (depending on her earnings history) because she can’t rely on a higher-earning spouse for benefits. Benefits that go to single women, such as working moms, also may be reduced because of time spent outside the paid workforce, such as to raise a young child or take care of an ailing parent.

One way to make Social Security fairer for working women would be to provide earnings credits for at least some of the time spent caregiving and raising children. For example, a worker might be awarded a year’s worth of Social Security credits for a year’s worth of such work, up to a certain limit. (Such a measure would be gender neutral and would also help some men, but it would primarily affect women.)

The argument in favor of such a reform is that it would make Social Security more responsive to modern realities and support women who may have low benefits. It could be expensive, however. For example, providing annual earnings credits for five years of child-rearing could increase the long-term funding gap by 8 percent. Plus, offering credits for caregiving may be hard to administer. The cost of such credits could be adjusted up or down, based on their size and the number allowed.

Another proposal would credit each spouse in a two-earner couple with 50 percent of their combined earnings during their marriage. This approach, known as earnings sharing, attempts to equalize the treatment of two-earner couples with those of more traditional, single-earner couples. (Under a growing number of circumstances, a working wife gets no more Social Security than if she had never worked outside the home.) Earnings sharing, however, could create new problems. Benefits for many widows could be reduced, unless such a proposal were designed to prevent that, adding to its cost.

Whether to Divert People’s Taxes to Private Accounts

Free-market advocates have long pushed to make Social Security more of a private program, in which some of your payroll taxes go into a personal account that would rise and fall with financial markets.

Supporters believe that your returns in the stock market would make up for cuts in your benefits. You would own the assets in your personal account and could pass them on to your heirs. Historically, the stock market has produced solid, positive returns when measured over long periods of time. Personal accounts could be introduced gradually, so that they would become a choice for younger workers while retirees and near-retirees wouldn’t be affected.

The argument against this strategy is that it would erode the basic strength of Social Security, which is a guaranteed benefit you can count on, and replace it with the uncertainties of Wall Street and other investments. Social Security was created as social insurance that protects workers and their families when they no longer can work because of death, disability, or retirement. Private accounts have no such mission, and workers couldn’t rely on the same protections for themselves or their dependents.

Whether to Create a Minimum Benefit

Social Security no longer has a real minimum benefit. Even with Social Security’s progressive benefit formula, low wage earners may end up with benefits insufficient to cover basic living costs. A higher minimum benefit can be achieved through various means. For example, a minimum benefit may be set at 125 percent of the poverty line (or some other percentage), targeting workers who have worked fewer than the 35 years that go into benefit calculations. In theory, the Social Security Administration could set a higher floor for benefits or include credits for unpaid work, such as for caregiving (see the earlier section “How to Treat Women More Fairly”). Also, a minimum benefit could be indexed to wage increases, keeping the minimum benefit adequate over time.

The problem is that a minimum benefit would cost money at a time when Social Security needs more of it. Further, it would weaken the relationship between contributions and benefits that has been so important to the program’s success. The total cost of a minimum benefit depends on the particulars, but by some estimates it could increase the shortfall by 2 percent to 13 percent.

Whether to Give a Bonus for Longevity

The oldest Americans are often the poorest. They may have little savings. Usually, they no longer work, they face significant health challenges, and if they have pensions, such income is usually eroded by inflation.

Hiking their benefits through a longevity bonus is one idea for how to help them. For example, a 5 percent benefit increase could be targeted to individuals above a certain age, such as 85. Like other proposals, the longevity bonus could be phased in and fine-tuned. It would directly help a segment of older Americans who have the greatest need for adequate benefits and have little or no way to strengthen their finances.

This proposal isn’t about saving money. For example, if a longevity bonus were offered 20 years after eligibility (which is age 62 for most people), it could increase the long-term Social Security shortfall by 9 percent. That’s the argument against the bonus or to limit its size.

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