4.4% Payroll Tax Increase Needed to Shore Up Social Security, Says CBO
The Congressional Budget Office (CBO) released a report in June projecting that the Social Security trust fund reserves will run out in 2029—one year earlier than CBO's past projections. The last five annual reports put out by the Social Security and Medicare Board of Trustees have suggested that the reserves will instead be exhausted sometime between 2033 and 2037.
Regardless of the exact year of depletion, once the Social Security reserves run dry, the program will only be able to pay out what's collected in Social Security tax revenues each year. Estimates suggest that retired beneficiaries would likely only receive about 75% of their currently expected benefit amount. So someone who is expecting a $2,000-a-month Social Security benefit in retirement would only get $1,500 once the reserves are gone.
Politicians have proposed several ways to "close the gap" so that future Social Security beneficiaries don't lose a big portion of their expected benefit. Some Republicans, including 2016 presidential candidate Jeb Bush, have suggested privatizing Social Security by giving every worker a separate locked account in which to save a portion of their income for retirement. This would protect workers against the risks of Social Security's insolvency.
Some lawmakers have also suggested raising the age that Americans would be able to start claiming Social Security benefits or changing the current calculations used to calculate benefits.
Others have suggested increasing Social Security taxes on higher-income Americans. Currently, the Social Security tax is only levied on up to $118,500 of Americans' income. A bill introduced by House Democrat John Larson of Connecticut called the Social Security 2100 Act would require the employment tax start to be paid again once someone's income reaches above $400,000. It would also impose an incremental payroll tax increase of the employment and self-employment tax, reaching 15.3% by 2084.
"The Social Security 2100 Act keeps the system solvent for the next 75 years and beyond, according to the independent analysis of the Social Security Administration's chief actuary, and does so without cutting benefits or contributing a dime to the deficit," Rep. Larson wrote in an op-ed in The Hill.
The CBO report suggested that a payroll tax increase of 4.4% today is needed to keep the reserves going for 75 more years, assuming there are no changes to the current income threshold that's taxed. However, a 2014 Social Security Administration report found that taxable payroll would only need to rise by 2.88% to maintain the reserves.
A lingering question, though, is how soon Congress or the President will take action on Social Security. Given that the 2016 presidential race has already begun, it's unlikely that the issue will see much movement in coming months.
The longer politicians wait to take action, the more severe the action will need to be in order to shore up the reserves. Charles Blahous, research fellow at the Hoover Institute, recently cautioned that Congress shouldn't wait too long to tackle Social Security, according to the Hill. "Lawmakers would do well to act promptly," he said.