The solutions to fully fund Social Security Disability and Retirement are not as complex as they are often made to appear
Much of the discussion involving the solvency of the Social Security Disability Insurance (SSSDI) program makes it sound like a “fix” is a really difficult problem. It is suggested that even though economic experts have forecast the shortfall for decades, we often see statements like, “Yet, despite around a dozen potential fixes being available, neither political party has been able to come up with an adequate solution as of yet.”
What is an “adequate” solution?
This issue is made to sound as if it were akin to developing a cure for cancer or a Grand Unified Theory for atomic physicists. The unstated premise is that it must be a very, very difficult problem, after all, Congress has been “grappling” with it for 35 years. What might be surprising is that the recommendations from the late 1980s essentially remain valid today.
Raise the retirement age
The retirement age for full Social Security retirement benefits was changed in the 1980s from 65 to 67, which will be applicable by 2027.
While this reduces pressure in the much larger retirement side of Social Security, it ironically makes things more difficult for the SSDI program, as those receiving SSD benefits transition to retirement benefits at full retirement age (FRA). This has meant SSDI has had to fund two additional years of benefits for disabled workers before they reach FRA and go on to the retirement side of the balance sheet.
This gradual increase to age 67 for FRA is one of the factors that have contributed to the exhaustion of the SSD trust fund that had been expected to occur this year, before the budget deal of last year resolved that issue temporarily.
Increase the amount of income covered by FICA
Raising the amount of income subject to FICA tax, which funds all of SSA’s programs, would eliminate a significant amount of the shortfall, and would protect beneficiaries to the year 2085 according to projections from the SSA’s Chief Actuary’s office.
One consequence of the lack of income growth for the majority of American workers during the last 50 years has been a reduction in the FICA receipts. The shifting of income into higher income brackets means proportionally, less income is subject to the FICA tax, which phases out at $118,500 in 2015.
By removing the limitation, SSA would receive an additional $100 billion, which would eliminate the shortfall. While that would potentially be an unpopular move among those earning more than $118,500, even increasing the limit to $150,000 would take care of 50 percent of the shortfall.
For those who wish to make it sound like SSA’s problems are technically intractable and unsolvable problems, this straightforward solution undercuts those arguments.
Increase the tax rate
An additional change that has been suggested would be to increase the rate of the FICA tax, which is shared between employees and employers. Increasing this tax by a few percentage points could also eliminate the need to cut 20 percent of SSD benefits in 2022 and the same percentage of retirement benefits in 2034.
The most politically palatable solution would be a combination of increasing the rate of the FICA tax, raising the phase out above the current $118,500 level and potentially increasing the retirement age.
Clearly, this is not a difficult technical problem of the same nature as a cancer cure. The important thing to remember is that we all hope that we will grow old and anyone could suffer a misfortune that could lead to the need for SSD. We all have an inherent interest in ensuring the long-term financial solvency of these programs.