Solutions for Social Security Sustainability

The Solutions Initiative 2024 brings together seven policy organizations from across the political spectrum: the American Action Forum (AAF), the American Enterprise Institute (AEI), the Bipartisan Policy Center (BPC), the Center for American Progress (CAP), the Economic Policy Institute (EPI), the Manhattan Institute (MI), and the Progressive Policy Institute (PPI). Each of those groups put forward comprehensive plans to address the fiscal path of the United States, and one area of significant focus was Social Security since it is the largest component of the federal budget. Right now, Social Security’s finances are in trouble, and without reform the program will be unable to pay out full benefits in about a decade. Luckily, all seven groups participating in the Solutions Initiative put forward reforms to extend Social Security’s solvency by at least 30 years.

The Current State of Social Security

Social Security is comprised of two programs — Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) — each with its own trust fund. Currently, Social Security spends more on benefits for OASI each year than it collects in revenues, thereby draining that trust fund. Social Security’s OASI Trust Fund will be depleted by 2033 under current projections, at which point benefits would be reduced by 21 percent since there would not be funds to pay out at the rate promised under current law. If theoretically combined with the program’s DI Trust Fund, the OASDI Trust Fund would be exhausted by 2035 and lead to a 17 percent reduction in benefits at that point.

The program’s financial shortfall is largely caused by an aging population. As a result of the nation’s changing demographics, the number of workers contributing to the program is growing more slowly than the number of beneficiaries receiving monthly payments. In 1964, there were 4.0 workers per beneficiary; that ratio has dropped to 2.7 today and will continue to fall in the future.

The good news is that many solutions exist to address the solvency of Social Security, and each of the organizations from the Solutions Initiative 2024 recommend policy options to address the shortfalls and stabilize the program. Those policy options largely influence the OASI Trust Fund — via changes to benefits and taxes dedicated to the account. Some groups also propose options that would affect the DI Trust Fund.

Changes to Social Security Benefits

Social Security provides benefits to nearly 59 million beneficiaries (equivalent to about 18 percent of the U.S. population) each year. Each organization includes at least one policy option that would change benefits for Social Security recipients in order to improve the solvency of the OASI Trust Fund.

Modify the Calculation of Social Security Benefits

Monthly benefits from Social Security are calculated by finding the average indexed monthly earnings (AIME) for the highest-paid 35 years a person worked and then applying a three-tiered formula to calculate the primary insurance amount (PIA). The PIA formula determines the level of level of income replacement one receives in monthly benefits once retired. For 2024, the PIA formula takes into account 90 percent of the first $1,174 in average monthly earnings, 32 percent of earnings between $1,175 and $7,078, and 15 percent of the earnings over $7,078 (up to a maximum monthly benefit of $4,873).

Adjusting the percentages in the PIA formula would influence the monthly benefit amount for all recipients, and altering only the upper percentage(s) would shield lower-lifetime earners from benefit reductions. AAF recommends that the PIA thresholds be adjusted to 90/32/5 percent, meaning high-income individuals who reach the last bend point would experience a lower replacement of income than under current law.

MI recommends that benefits be based on the top 38 years of earnings, rather than the current 35 years. Since three more years of equal or lower earning history would be included when calculating the AIME, this option would decrease benefits (and therefore improve the trust fund’s projected balances). MI and BPC recommend changing the PIA calculation to an annualized “mini-PIA” formula, which would calculate an individual AIME and PIA for each year with taxable earnings.

PPI implements a new formula to award benefits that is based on years worked rather than the current structure which uses average lifetime earnings. Thus, no one who worked 20 or more years would experience poverty in retirement. Notably, PPI’s proposal would credit parents with five years of work for caregiving.

In all, each of the options would improve the solvency of the trust fund by decreasing scheduled benefits through altering or replacing the AIME or PIA calculations.

Use a Different Measure of Inflation for Cost-of-Living Adjustments (COLAs)

Each year, Social Security benefits are adjusted using an inflation index, currently the CPI-W, to account for changes to the cost of living. Many economists believe that the CPI-W overstates inflation, so benefits grow faster than the true increase necessary to maintain a standard of living.

AAF, BPC, MI, and PPI choose to replace the current index with the C-CPI-U, which accounts for substitution effects of goods and services that have risen in price and therefore is a better measure of cost of living. Thus, annual adjustments would be lower, slowing the growth in retirees’ benefits and the pace at which money flows out of the trust fund.

Additionally, MI would eliminate COLA adjustments for high-income beneficiaries (defined as those who made $100,000 individual or $200,000 couple in the prior year, adjusted annually for inflation). That change would also decrease scheduled benefits and prolong solvency of the trust fund.

Raise the Retirement Age

Current law sets the early retirement age at 62 and the normal retirement age at 67. The early retirement age is when an individual can begin collecting benefits subject to a permanent reduction, and the normal retirement age, also known as the full retirement age, is when an individual can begin collecting full Social Security benefits. Pushing back either of those ages improves the solvency of Social Security by having people pay into the trust fund for more working years and delaying when they begin to take out benefits. As life expectancy continues to rise, policymakers have advocated for pushing back the early and normal retirement ages as a means of improving the OASI Trust Fund.

Four organizations from the 2024 Solutions Initiative chose an option(s) in this category. MI would raise the early and normal retirement ages to 64 and 69 years but do so gradually beginning in 2030. BPC also gradually increases the full retirement age to 69 years, with AAF at 70 years. PPI indexes the retirement age to longevity (with a special early retirement age for lower-income workers who risk outliving personal savings).

Protect Those Who Most Need Social Security

Social Security is responsible for lifting 23 million beneficiaries above the poverty line annually. As such, organizations take care to provide for vulnerable and lower-income beneficiaries while simultaneously shoring up the program.

EPI, MI, and PPI emphasize closing the gap between lower-income and higher-income benefit amounts as part of needed Social Security reform. MI and EPI note that doing so would achieve the original intent of Social Security — poverty protection. MI’s package of proposals would avoid any change to benefits for the bottom 40th percentile (although they would raise the eligibility age). Similarly, PPI’s changes to Social Security correlate to benefit cuts for only the top one-fifth of lifetime earners.

BPC, MI, and EPI all establish a minimum benefit for Social Security to ensure that no worker is in poverty during retirement. BPC proposes a basic minimum benefit formula for those who have reached the normal retirement age that includes a base amount minus 70 percent of one’s monthly OASI benefit. MI sets the level at 125 percent the federal poverty line for those with full work histories; EPI does not clarify a specific minimum benefit level.

AEI proposes a means-tested benefit for all retirees and widow(er)s regardless of earning history — equivalent to 28 percent of the national average wage for individuals and 41 percent for couples.

Changes to Payroll Taxes and Taxation of Benefits for Social Security

All seven organizations also include changes to payroll taxes or the taxation of benefits in their list of policy options to secure a stable future for Social Security.

Adjust Rates for the Social Security Tax

Under current law, the payroll tax rate for Social Security is 6.2 percent for both the employee and the employer — totaling 12.4 percent. Those tax collections accounted for 91 percent of trust fund inflows in 2023.

Proponents of an increase in the payroll tax rate note that it would be relatively simple to implement and would fall equally on the employee and employer. Opponents of raising the tax argue that it is regressive in nature, since lower-income individuals typically pay a higher proportion of their overall income in payroll taxes than do higher-income earners.

Four organizations (BPC, EPI, MI, and PPI) adjust the Social Security payroll tax, although not all groups would implement the policy in a manner that would raise revenues. BPC lifts the payroll tax rate by 1 percentage point over 10 years, bringing more revenues into the trust funds and extending the solvency of Social Security. All other organizations with a payroll tax option decrease the rate in some way. For example, EPI incorporates a 15 percent combined Federal Insurance Contributions Act/Federal Unemployment Tax Act tax rate, MI eliminates the payroll tax at age 62, and PPI phases out the Social Security tax over five years. MI’s option is expected to be revenue-neutral, while EPI’s and PPI’s options decrease anticipated money going into the trust funds and supplement revenues in other ways within their comprehensive plans.

Modify Cap on Taxable Earnings for Social Security

The payroll tax rate of 12.4 percent is applied to all wages up to a designated income limit, which is adjusted annually based on growth in the national average wage index. The 2024 cap on taxable earnings is $168,600. Increasing or eliminating the cap on taxable earnings would make the payroll tax system less regressive by increasing the total tax liability of higher-income earners while preserving the status quo for low- and middle-income earners. Additionally, it would counteract growing income inequality in the United States. However, opponents of increasing or eliminating the Social Security tax cap argue that it would force higher-income earners to pay a disproportionate amount into the system relative to the benefits they receive.

Two organizations choose to increase the cap on taxable earnings as a means of increasing funds to the OASI Trust Fund (AAF and BPC) and two would eliminate it completely (CAP and EPI). AAF raises the cap to cover 90 percent of earnings, and BPC increases the taxable maximum to $225,000 by 2029 (indexing to the average wage index plus 0.5 percentage points thereafter).

Change Taxation of Social Security Benefits

Under current law, benefits are only taxed if they surpass $25,000. Annual benefits totaling $25,000 to $34,000 are taxed up to 50 percent; annual benefits beyond $34,000 may be taxed up to 85 percent. Collections from the taxation of Social Security benefits return to the trust fund and are used for future Social Security payments. Thus, increasing the taxation of benefits improves the solvency of Social Security.

Three organizations choose to increase taxes on Social Security benefits according to various thresholds:

• AEI fully taxes all Social Security benefits.
• BPC only taxes the Social Security benefits of high-income beneficiaries, defined as individuals/couples with a modified adjusted gross income of $250,000/$500,000. The option would maintain the taxation of up to 85 percent of benefits beyond $34,000.
• PPI fully taxes the Social Security benefits of individuals/couples who make combined incomes of $45,000/$58,000.

Changes to Disability Insurance

Social Security pays monthly disability insurance benefits for disabled or blind workers and their families via the DI trust fund. Under current law, DI applicants who are 30 years old or older must have worked for five of the last 10 years (equivalent to 20 quarters). AAF and MI advocate for reforms that would require DI applicants to have worked in more recent years — four of the last six years (equivalent to 16 quarters). The policy option would only apply to new applicants who are not blind and intends to improve the targeting of benefits towards those who most need them.

AEI would repeal the income and payroll tax exclusions for employer-provided accident and disability insurance, increasing tax collections that go to the DI Trust Fund. The plan also includes an option to institute an “experience rating” for the employer-levied DI payroll tax, which would set employer premiums based on the previous benefits paid to employees of that employer. The proposal incentivizes employers to provide accommodations for disabled workers to remain employed, if possible.

Conclusion

It is difficult to address the U.S. fiscal trajectory without including the largest program in the budget — Social Security. As such, each of the 2024 Solutions Initiative participants provide options to make the program solvent through at least 2054. The organizations’ plans reform both spending and revenues dedicated to the program through a combination of benefit adjustments and changes in payroll taxes and taxation of benefits. Organizations also provide reform options for Disability Insurance, ensuring that the trust fund is able to pay out benefits to the target demographic for longer than would otherwise occur.

The detailed menu of policy options for Social Security included in the Solutions Initiative 2024 can inform the national conversation in advance of November’s election and provide a deep playbook for lawmakers to draw from in the years ahead to put this essential program on a stable path. Check out the full plans here.

Related: Despite Decades of Warnings, the Depletion of Social Security’s Trust Fund Has Been Getting Closer

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