Raise Taxes. Payroll taxes started at 2% and now are up to 12.4%. And many believe that payroll taxes are a disincentive to work because workers are not confident they will receive their Social Security, so they view them as a loss. This is contrasted with their 401(k) contributions that they view as deferred income and therefore not a disincentive to work.
Increase the current payroll tax ceiling of $128,000. President Roosevelt capped payroll taxes to keep Social Security from looking like a welfare program. Social Security benefits are only based on taxable earnings. Some argue that currently only 84% of total earnings are subject to the payroll tax, down from 90% in 1983. Yet, the average across the life of Social Security is 84%. Lifting the cap to cover 90% of total earnings would fix about one-quarter of the program’s 75-year deficit, eliminating the cap completely would fix about half of the shortfall. However, lifting the tax ceiling would effectively increase the top marginal tax rate by 12 percentage points. The top tax rate on earned income is currently around 44%, including income taxes and the individual portion of payroll taxes. If the tax ceiling was eliminated that would raise the top rate to around 57%, and that’s before state income taxes.
Raise the retirement age. Early retirement age is 62 and benefits increase by almost 7% for each year you delay up through age 70. Full retirement is now 66, it was originally 65 but reforms in 1983 included gradual increase to 67 by the 2020s. Increasing the retirement age reduces benefits by almost 7% for each year, which sends the message to work longer. However, since longevity is rising mostly among higher earners, raising the retirement age can be seen as disproportionately impacting lower earners. Any reform package should balance out raising the retirement age with reforms that will help low earners.
Tying benefits to a different metric, like ‘Chained CPI’. Currently, benefits are increased based on the Consumer Price Index for Urban Wage Earners (CPI-U). Most economists believe CPI-U overstates true inflation and therefore Chained CPI-U is a more accurate metric. Generally, Chained CPI shows inflation about 0.3% lower than CPI-U and would solve about 20% of program’s deficit. It is popular amongst some reformers because it produces savings to the program quickly. However, it also impacts benefits for current retirees.
Flat Benefit set at Poverty Line could ensure no American is retiring into poverty, and then incentivize higher earners to save more through 401(k) programs. Also, it could eliminate the payroll tax at age 62 which would encourage workers to delay retirement while making older workers uniquely attractive to employers.
