Last week, I wrote about some of the problems facing the U.S. Social Security program.

Although the combined Social Security trust funds had $2.9 trillion in assets at the end of 2017, demographic changes over the next decade and a half are expected to eliminate that surplus by 2034. At that time, anticipated tax income on workers is expected to fund only 79% of scheduled benefits to retirees and disabled beneficiaries.

Fortunately, there are a number of potential solutions that could help close the Social Security funding gap. The question is whether American politicians will come together to make some difficult choices today, or keep kicking the can into the future, when the problem will likely be more difficult to solve.

The Social Security Board of Trustees noted in their 2018 Annual Report that “lawmakers have a broad continuum of policy options that would close or reduce Social Security’s long-term financing shortfall” and “recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust to them.”

Those potential policy options come from across the political spectrum. The Trustees noted that “broadly speaking, the approaches that lawmakers can take include increasing revenues from workers and employers by raising the tax rate or the maximum level of taxable earnings, or by dedicating revenues from other sources; lowering benefits for some or all beneficiaries by changing certain program parameters; or a combination of these approaches. There are countless variations on these options, including those that vary the timing, magnitude, and other specifics of the changes under consideration.”

The non-partisan Committee For A Responsible Federal Budget (CFRB), whose Board Members and Directors include many prominent Democrats and Republicans, noted in its Analysis of the 2018 Social Security Trustees’ Report that “most of the options to fix Social Security’s finances are well-known and could easily be enacted and implemented with political will.” The CFRB believes that “thoughtful reforms enacted today can still promote growth, assure solvency, protect or enhance benefits for those who need them, and give workers and taxpayers time to plan and adjust.”

However, the CFRB also noted ominously that “it is already too late to fix Social Security through easy incremental changes. Waiting another fifteen, ten, or even five years will continue to limit available options and put Social Security at risk.”

In my opinion, the time to act is now. The question is whether our elected officials share that sense of urgency and are willing to work together to craft a solution that works for our country.

The CFRB’s website has a nifty Social Security Reformer tool, which allows anyone to design their own comprehensive reform package and review the impact their recommendations could have on the Social Security program.

Today I’m going to look at three potential solutions I constructed with the CFRB’s reformer tool – a hypothetical solution from the left side of the political spectrum, a hypothetical solution from the right side of the political spectrum, and my own (hopefully!) more pragmatic and moderate solution! My goal is to show that there are many potential options that could close the Social Security funding gap!

From the Left: Higher Taxes and Lower Benefits for the Wealthy

I first used the CFRB’s Reformer tool to develop a hypothetical long-term solution that might be proposed by the likes of Bernie Sanders, Elizabeth Warren, or Nancy Pelosi, with four key changes to close the Social Security funding shortfall:

1. Slowing Benefit Growth for the Top Half of Earners – Initial Social Security benefits are calculated through a formula based on average lifetime wages. This change would create a new bracket at the median income, and slow future benefit growth for those who earned more than average.

2. Creating a Minimum Benefit at 125% of Poverty – Right now its possible for a full-career worker to have a below poverty Social Security benefit level. This change would guarantee retirees who worked at least 30 years a benefit equal to 125% of the poverty line, regardless of what their actual earnings were.

3. Increasing the Payroll Tax by 1% – Social Security is primarily financed through a 12.4% payroll tax, split evenly between the employer and the employee. This change would raise more money by increasing the payroll tax on wages to 13.4%.

4. Subjecting All Wages to the Payroll Tax – The Social Security payroll tax currently applies to the first $128,400 of earnings. This option would immediately apply the payroll tax to all earnings.

From the Right: Reduced Benefits and Investing in the Stock Market

I next used the CFRB’s Reformer tool to develop a hypothetical long-term solution that might be proposed by the likes of Paul Ryan, John McCain, or Mitt Romney, with six key changes to close the Social Security funding shortfall:

1. Raising the Full Retirement Age to 69 and then Indexing to Longevity – By 2027, the normal retirement age will be 67. This option would continue to increase the age two months per year until it reached 69, and then index it for longevity. The earliest eligibility age would remain at 62.

2. Indexing COLAs to Chained CPI – Social Security beneficiaries currently receive an annual cost of living adjustment (COLA) based on inflation. Many experts believe the measure of inflation used, the CPI, overstates cost of living changes. This option would index the COLA to the chained CPI, which is considered a more accurate indication of inflation.

3. Tightening SSDI Eligibility Criteria – This option would tighten the eligibility criteria for disability benefits, requiring that disabled workers have worked for four of the past six years; lowering the maximum amount beneficiaries can receive; and requiring the submission of all medical evidence prior to a disability hearing, among other changes.

4. Applying the Benefit Formula to Annual Earnings – Currently, benefits are calculated by applying the benefit formula to a workers average earnings over their top 35 earning years. This change would instead apply the benefit formula individually to each of their highest 35 years of earnings and divide the sum by 35, rewarding people with more consistent earnings histories.

5. Covering Newly-Hired State & Local Workers – Some state and local government employees are exempt from the Social Security system. This change would require all newly-hired state and local workers to pay into the system, and then receive benefits from the system.

6. Diversifying The Trust Fund to Increase Returns – The Social Security Trust Fund is currently invested entirely in non-marketable government bonds (essentially U.S. Treasuries). This option would allow the Social Security Administration to replace some of those government bonds with corporate bonds, stocks, and other investments that would increase the expected annual return of the trust fund.

From ROMT: A More Balanced Approach

Finally, I used the CFRB’s Reformer tool to develop a long-term solution I’d be more likely to support, with smaller tax increases than my hypothetical solution from the left, and larger benefits than my hypothetical solution from the right. My proposal includes five key changes to close the Social Security funding shortfall:

1. Reducing Initial Benefits by 1% – Initial Social Security benefits are calculated by applying a progressive formula to average lifetime wages. Because past wages and the benefit formula are indexed by wage growth, initial benefits grow year-by-year at the rate of wage growth. This change would reduce initial benefits for new beneficiaries by 1%.

2. Indexing Age to Longevity After it Reaches 67 – By 2027, the normal retirement age will be 67. This option would then index the age to longevity to maintain a constant ratio of expected retirement years to potential work years. The earliest eligibility age would remain at 62.

3. Tightening SSDI Eligibility Criteria – This option would tighten the eligibility criteria for disability benefits, requiring that disabled workers have worked for four of the past six years; lowering the maximum amount beneficiaries can receive; and requiring the submission of all medical evidence prior to a disability hearing, among other changes.

4. Subjecting All Wages to the Payroll Tax – The Social Security payroll tax currently applies to the first $128,400 of earnings. This option would immediately apply the payroll tax to all earnings.

5. Diversifying The Trust Fund to Increase Returns – The Social Security Trust Fund is currently invested entirely in non-marketable government bonds (essentially U.S. Treasuries). This option would allow the Social Security Administration to replace some of those government bonds with corporate bonds, stocks, and other investments that would increase the expected annual return of the trust fund.

Summary: How To Fix Social Security

The point of this post wasn’t to claim I’ve developed the best solution to close the Social Security program’s funding shortfall.

The point was to demonstrate that, despite what some may believe, there are plenty of possible solutions to address Social Security’s long-term viability. Relatively modest changes could ensure Social Security will continue to provide benefits to tens of millions of Americans for many decades to come.

The only question is whether our legislators possess the common sense to collaborate and compromise to deliver U.S. citizens a truly bipartisan solution. The longer they wait, the worse the potential medicine for Americans will be!

Next time, I’ll discuss how I’m thinking about Social Security as I pursue financial independence and early retirement.

Have you tried out the CFRB’s Social Security Reformer Tool? What is your proposed solution?