In Social Security’s 2023 annual report, a forecast emerged indicating that the program’s surplus could be depleted by 2035 if no governmental interventions are implemented. While this announcement sparked concerns of Social Security running “broke,” the reality is more nuanced.
Social Security operates on a pay-as-you-go system, relying on FICA payroll taxes to fund the benefits it disburses. As long as workers and employers continue to contribute FICA taxes, the program will sustain itself financially.
“With the aging population, the surplus may indeed diminish without proactive measures to fortify the trust fund.”
However, with the aging population, the surplus may indeed diminish without proactive measures to fortify the trust fund. In response, President Biden has put forth several proposed adjustments.
Reinstating Payroll Tax on Income Above $400,000
The Social Security payroll tax contributes substantially to the program’s revenue, accounting for approximately 90% of its annual collection. Currently, only a small fraction of workers hit the tax cap each year, set at $168,600 for 2024. Earnings beyond this threshold are exempt from Social Security taxes.
To bolster the Social Security surplus, President Biden suggests reinstating the payroll tax on earned income exceeding $400,000 while leaving earnings between $168,600 and $400,000 untaxed. This measure aims to augment Social Security revenue over time, particularly as more individuals ascend to higher income brackets.
Base COLA Calculation on CPI-E Instead of CPI-W
Traditionally, Social Security determines cost-of-living adjustments (COLAs) using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). However, studies reveal that this index inadequately captures retirees’ expenditure patterns, particularly concerning healthcare expenses. President Biden proposes transitioning to the Consumer Price Index for the Elderly (CPI-E) for COLA calculations, offering a more precise reflection of retirees’ spending habits and potentially shielding elderly beneficiaries from financial strain in their later years.
Increase in Primary Insurance Amount
The “primary insurance amount” (PIA) denotes the benefit individuals receive upon opting for Social Security at their full retirement age. Acknowledging the mounting expenses unique to retirees, President Biden suggests incrementally raising the PIA by 1% annually, commencing at age 78 and concluding at age 82, until it reaches a total augmentation of 5%.
Naturally, implementing these proposals necessitates bipartisan support in the U.S. Congress.
For a deeper understanding of your Social Security options, consider consulting with an FRC® trained advisor well-versed in FERS benefits.
