Policies to Increase the Viability of Social Security

Policies to Increase the Viability of Social Security
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Policies to Increase the Viability of Social Security
Table of Contents Executive Summary. 3 Introduction. 3 Social Security Policies. 3 Increasing Payroll Taxes. 3 Increasing or Eliminating Tax Cap. 4 Expanding Compensation Subjects. 5 Increase the Full Retirement Age. 6 Savings Policies. 6 Empowering People. 7 Tax Incentives. 7 Conclusion. 8 References. 9 Appendices. 10 Executive Summary
Statistics show that the Social Security program will become insolvent in about 17 years from now. This implies that most retirees will not be able to meet their needs in the future. Moreover, savings among most Americans are very low with majority not having any savings. Based on this information, this report provides policy changes that will ensure Social Security solvency in the future and encourage people to save more.
Introduction
Social Security is America’s largest social program and accounts for more than a quarter of government spending, which makes it one of the largest items in the government budget. Before the creation of Social Security, most Americans could not support themselves after retirement. However, today majority of these retirees can support themselves through the program, although it is controversial. Much of the controversy revolves around its long-term financial viability. It has been argued that money from the program is not used for its intended purpose prompting its proponents to claim that if the money was used for its purpose and encouraged shared economic sacrifice, the financial viability of Social Security would be assured. Based on the available data and forecast, within 17 years, Social Security funds will be depleted if timely actions are not taken. This paper proposes some changes to the existing policies regarding Social Security to increase its viability and how the Fed can encourage its residents to save more.
Social Security Policies
Increasing Payroll Taxes
When employees check their paychecks and see deductions for Social Security’s Old-Age, Survivors, and Disability Insurance (OASDI), it demonstrates their contributions to Social Security. Employers make similar contributions on behalf of employees. Payroll taxes account for more than 85% of the sources of Social Security revenues (See Appendix A) (Social Security, 2021). Therefore, an increase in payroll taxes implies that more money will be coming in to fund Social Security benefits in the future. This policy should apply even to those who are self-employed. The current policy requires that employees pay half of the contributions while their employers pay the remaining half. The self-employed are required to pay the taxes in full per year. For this policy to be effective, the Federal government should address the current wave of unemployed individuals. With more individuals in employment, either self-employed or working class, more money will be contributed to the fund.
Restoring the viability of Social Security will depend on when and how the rate is changed. If it is implemented now without changing other taxes or benefits, employers will start contributing more towards Social Security. If the policy is implemented when Social Security is about to be depleted, employees will be required to raise the rate higher to close the solvency gap. Social Security has a regressive tax due to its flat rate and cap, where low and moderate-income earners pay more than those in the high-income earning bracket. Considering the impact of Social Security, it implies that it is progressive. Therefore, increasing the payroll taxes to increase the viability of Social Security will be progressive.
Increasing or Eliminating Tax Cap
Another way to increase the viability of Social Security is by increasing or eliminating the tax cap. The increasing wage growth among the top earners implies that a larger portion of taxable wages is outside the Social Security tax cap. Therefore, introducing Social Security tax cap changes implies that only the highest-earning employees will be affected. Based on the available data, more than 6% of employees earn above the current tax cap in a year (See Appendix B) (Congressional Research Service, 2021). Most of these workers receive higher earnings in their lifetime, translating to higher Social Security benefits (Romig, 2016). Eliminating the tax cap implies that all employees and their employers will contribute to Social Security, and higher employees will pay more. Therefore, increasing or eliminating the tax cap will increase the viability of Social Security (See Appendix C).
Based on the current data, the cap does not affect most employees because their earnings are below the cap (See Appendix D). The case differs for higher earners regardless of whether the tax cap is eliminated or raised. If the cap is eliminated, the taxes will increase for top earners. Although this policy promises progress for Social Security, policymakers should also implement necessary measures to limit tax avoidance cases.
Expanding Compensation Subjects
Another strategy to increase the viability of Social Security is to expand compensation subjects to the payroll tax. Employees’ compensation is done in fringe benefits which are not included in Social Security taxes. Some benefits exempt from Social Security taxes include employer-sponsored health insurance premiums. Thus, including them in the Social Security taxes bracket will broaden its base and improve employee social security benefits, increasing its viability. Most American workers receive health care coverage from their employers, and both worker and employer premiums are not included in income and payroll taxes. Excluding health coverage premiums from taxes only benefits top earners. High-income workers are likely to receive health c...