With the presidential election season in full swing the topic of "how to fix social security" is certainly on every candidate's agenda and rightly so. However, at present, the most critical issue regarding social security is the viability of the social security disability fund.
By way of background, the Old-Age and Survivors Insurance (OASI) fund and the Disability Insurance (DI) fund together make up what is known as the Social Security Trust Funds. Retirement benefits are paid out of the OASI Trust Fund while benefits paid to disabled workers are paid from the DI Trust Fund.
As of today, an astounding 60 million Americans receive benefits from social security.
That represents nearly 20% of the U.S. population! Furthermore these numbers are expected to continue to rise as the wave of baby boomers reach retirement age and life expectancies continue to increase.
It is important to note however that, of the 60 million social security beneficiaries, 11 million receive disability benefits and therein lies the more pressing issue at hand. Specifically, the social security disability trust fund is expected to run out of funds sometime in 2016.
If that were to happen does that mean that beneficiaries would immediately stop receiving their social security disability checks? No but it does mean that they will see a reduction in their benefits of approximately 19%. The reason their benefits would not stop completely is that their benefits would continue to be funded from current tax revenue coming in from employee payroll taxes. Since a social security disability beneficiary receives on average $1,017 per month they can expect their monthly check to automatically drop to about $824.
It should be noted however that the anticipated depletion of the social security trust fund is not a rare occurrence. This circumstance has happened a number of times in the past and the resolution has always been the same. Congress authorizes a shift of funds from the social security retirement fund to the social security disability fund. In fact, this procedural fix has been so common that it is all but automatic. The problem this time is that even this automatic procedural fix has been politicized with opposition from members of Congress in order to put pressure on Congress to try and force a permanent fix to the issue of social security funding before allowing this historically acceptable fix from being approved.
Once again, the American people (in this case disabled Americans) are caught in the middle of a political debate which often escalates into non-sensical banter with no meaningful collaboration to solve one of the countries most pressing financial issues.
One proposed solution to remove some of the political wrangling from the process would be to combine the social security retirement fund and the disability fund. This would have little impact on the viability of the retirement fund and would remove the inevitable future battles over when and how to use the retirement fund to provide short term financial support for the disability fund.
The viability of both social security funds are indeed at risk.
If Congress cannot agree on acceptable and effective changes to the system the social security trust fund is expected to run out of money in 2035 at which time retirement benefits would be reduced by 25% for all recipients. On-going payroll tax receipts would provide for continued benefits, albeit reduced.
So what can be done to resolve the issues potentially crippling the social security system? There are numerous possible solutions including, but not limited to, pushing out the full retirement age for younger Americans from 67 to 68 or even 69. Perhaps increasing the social security taxable wage base from today's $118,500 to say $150,000 so that higher income earners pay more into the system. Possibly reducing cost of living increases by 1% or perhaps increasing the social security payroll tax from 6.2% to 6.5%. Certainly numerous possible solutions have been proposed but it's up to our elected officials to work together to develop and agree on a strategy and move forward.
The question is likely not if changes will be made but which changes can be agreed upon and how and when should they be implemented. Fortunately with a presidential election around the corner we all have an opportunity to let our voices be heard. None of these changes are likely to be easy but they are necessary in order to ensure that social security will be there for the tens of millions of Americans in or approaching retirement.