Fixing Social Security

The immediate news about the Social Security program is grim: This year the retirement program is scheduled to pay out $1.7 billion more than it takes in.

While that is certainly a lot of money, keep in mind that it is less than a tenth of one percent of Social Security’s $2.9 trillion in asset reserves. Even so, under current circumstances, the program would be out of cash by 2032.

A June 23 story on The Motley Fool investment website reports that a fix is pretty simple — if Congress tends to it soon.

Social Security’s largest source of money is a 12.4 percent tax on income. If you are self-employed, you pay the full amount. But if you work for someone else, you pay half (6.2 percent) and the employer pays the other half.

Social Security’s trustees have done the math, and The Motley Fool reports that a 2.84 percentage-point increase in the payroll tax could solve the financial problem for as long as 75 years.

Round that up to three percent, and it would increase the payroll tax to 15.4 percent. Most workers would pay 7.7 percent, with the employer contributing the same amount.

To put it another way, for every $10,000 an employee earns, $770 would be directed to Social Security. Currently, that figure is $620 of every $10,000 in earnings.

A higher payroll tax is far from a happy thought. If there is a bright side to the idea, it does remind the “Social Security Won’t Be There When I Retire” crowd that fixing the program is pretty simple once the political will is found.

Raising the payroll tax is unfortunately a better alternative than two other solutions.

One would be a huge reduction in monthly Social Security benefits, perhaps as high as 21 percent. This would greatly affect the 15 million retirees who get all their income from the program.

The other would be applying the payroll tax to income above the current maximum of $128,400. This would bring in more money, but not enough, since only a small percentage of workers earn more than that amount.

What may be most interesting to watch is how quickly Congress acts. The Motley Fool’s figures are based on immediate legislation, which is unlikely.

There’s no telling how rapidly Social Security’s reserves will be reduced, although the general trend in the last few years is that the program’s payments caught up to revenues a few years earlier than originally expected.

If Congress waits five or 10 years to do something, it’s possible that the three percentage-point addition to the payroll tax will not be enough to rebuild Social Security’s assets for the long term. Quick action is the better solution.

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1. He drove a blue ‘77 Chevy Nova in high school. 2. He played on Jackson Prep’s 1985 and 1986 state championship basketball teams.