It seems like every news cycle includes an article about how the Social Security trust fund is about to run out of money.  ‘About’ may be somewhat of a misnomer.  Estimates vary and change as the economy goes through its ups and downs, but the trust funds reserves used to pay beneficiaries are set to become ‘insolvent’ in 2034; this is according to the Social Security Board of Trustees.

That does not mean that, a decade or so down the road, we will witness the abrupt termination of Social Security benefits for seniors who qualify.  The program receives its revenues from two sources: the money paid in by workers through their FICA contributions, and—where this is insufficient to pay for the benefits—from the trust fund to make up the difference.  The most recent estimate is that, if nothing is done and the trust fund is allowed to be depleted, the Social Security Administration will pay 81% of the benefits that you see on your benefits statement.

Assuming that Congress is unlikely to ignore the problem; the more relevant question is which of the many proposals will be put into place.  One is to simply raise the full retirement age from 67 to 68 immediately and then bump it up progressively by two months each year thereafter.  A second, similar proposal would index the Social Security retirement age to rising lifespans, which would address more of the funding gap.

Another set of proposals would lower the annual inflation adjustments for retirement benefits by switching to a different (less generous) inflation measure.  Of course, that might raise political hackles, since most economists say that the current benefits increases do not keep up perfectly with inflation as it is.

There are several proposals to increase the tax cap on FICA payroll taxes, that is, the maximum amount of income that is subjected to FICA assessments.  Another proposal would subject all earnings to Social Security taxes.  That could be a political winner, since only 6% of American taxpayers would be affected.  Alternatively, there has been a Congressional proposal to raise the 6.2% payroll tax rate associated with the social security rate to 7.2% and leave the cap where it is (indexed to inflation).  

Finally, several proposals would create a means test for receiving Social Security benefits, meaning that people who are receiving higher income in retirement would see their Social Security checks reduced.

Which will ultimately be adopted?  Who knows?  Hopefully, the solution will be the most rational, as opposed to what is most politically expedient.

This article was written by an independent writer for Brewster Financial Planning LLC and is not intended as individualized legal or investment advice.