Since at least the 80s back to when it was created by FDR, people have claimed that Social Security will go bankrupt. While no one can predict the future, industry experts widely agree this to be a myth. However, the embattled agency is clearly facing a significant shortfall over the next 20 years. This leaves the federal government with two options: cut benefits or raise taxes.
Considering that cutting benefits would have a significantly harmful financial impact on older people, who tend to vote in larger numbers than younger generations, this seems unlikely. That leaves raising the Social Security payroll tax rates and/or increasing the taxable wage cap as the most likely scenarios.
How Bad Is the Shortfall?
According to the annual report of the Social Security and Medicare Boards of Trustees, the total income for Social Security is projected to exceed its total cost through 2019, just as it has since 1982. After 2019, interest income and money taken out of reserves will provide the resources needed to offset Social Security’s annual deficits until 2034.
By then, if Congress does nothing, the federal government will collect enough in payroll taxes to pay about 75% of scheduled retirement benefits until 2090.
The Social Security Administration projects that unfunded obligations will reach $11.4 trillion by 2090. That’s up $700 billion from the $10.7 trillion the administration projected for its 2089 shortfall.
Plugging the Gap
The Motley Fool pointed out the following in a recent article: “The most obvious would be an across-the-board increase – that is, raising the tax rate. For example, options that have been suggested are raising the Social Security tax rate by one percentage point, to 7.2%, and phasing the increase in over an extended period, such as a decade or two. According to a study by the National Academy of Social Insurance (NASI), this would take care of 52% of the Social Security funding gap all by itself.” However, with the inevitable public backlash to this, could this pass through a Republican-controlled congress and avoid a veto?
“Another way to increase the Social Security payroll tax would be to increase the wage cap, or eliminate it altogether. When Social Security was started, the wage base covered 90% of all earned income. Now, just 82% of wage income is taxed for Social Security, so there’s certainly a case to be made in raising the wage cap. It’s estimated that increasing the Social Security taxable wage cap to cover 90% of earnings (a limit of about $270,000) over a five-year period would correct 29% of the funding shortfall. Eliminating the wage cap completely would take care of 74% of the shortfall.” This option could cause less public backlash but directly affect the people that have the most influence in Washington…
Where Do We Go from Here?
No one knows what or when, but we continue to monitor the situation along with all other payroll tax changes that affect your payroll clients and your bottom line. You can count on PTM to stay on top of rates and/or the wage cap increase so that you can focus on running your payroll business.