Social Security Is Broken. Here's How to Fix It

The Social Security Administration (SSA) has come under significant scrutiny in recent months after recipients were asked to pay back large sums after benefits were accidentally overpaid. But its problems loom considerably larger than the estimated one million beneficiaries who have been asked to pay back sums to the government agency, as a funding black hole threatens to put the agency in peril just over a decade from now.

As it stands, according to the SSA, trust funds are due to run out in 2034. According to a recent report by the American Academy of Actuaries (AAA), if Congress does not take action before then, the program may be faced with an automatic 20 percent benefit cut for current beneficiaries, the need to increase Social Security taxes by 25 percent, or face a combination of benefit cuts and tax increases.

Payments from the SSA, which include retirement benefits, Social Security Disability Insurance (SSDI), Supplemental Security Income (SSI), among others, often make up the bedrock of financial means for some of America's most vulnerable individuals and families. It is also a vital element of retirement income for millions of Americans. Social Security is financed through a dedicated payroll tax paid by employers and employees in America.

"Social Security benefits now exceed Social Security revenues," Richard Johnson, director of the Program on Retirement Policy at the Urban Institute, a Washington-based think tank, previously explained to Newsweek. "That shortfall is being made up by the program trust fund, which accumulated over the past four decades. But unless federal policymakers take action, the trust fund will run out in 2033, and Social Security will be able to pay only about 80 percent of scheduled benefits."

But the question remains: how? According to the AAA report, there are a myriad of ways in which the system could be changed to cling on to solvency in the years to come.

How Can Social Security Be Fixed?

There are two main ways the AAA proposes a fix for the SSA's upcoming funding shortfall. Broadly speaking, they fall under two categories: tax increases and benefit cuts.

Remove the income limit for taxation, subjecting all earnings to taxation is one option floated by the group. Currently, Social Security taxes apply only to earnings up to $160,200. Removing this cap could result in higher contributions from high-income individuals. However, as this alteration alone would address only 78 percent of the projected 2034 shortfall, additional adjustments are recommended by the American Academy of Actuaries.

Another option is to impose taxes on all income exceeding $400,000 or apply the payroll tax to 90 percent of total earnings. According to the report, these modifications might address 55 percent and 36 percent of the anticipated shortfall, respectively.

The AAA also proposes another fix: raise the payroll tax rate by 25 percent. By increasing the Social Security payroll tax rate from 6.2 percent to 7.75 percent for both workers and employers, there could be sufficient funds to cover 100 percent of benefits in 2034. However, this elevated tax rate might pose a financial burden for low-income workers and may not fully cover future benefit costs, the AAA has said.

But increasing taxes is naturally not a popular idea across swathes of the political spectrum—being something Republicans are ideologically opposed to. But the other option is to cut benefits—something that typically won't sit well with Democrats and those positioned further to the left.

Other options, according to the AAA, include cutting benefits for recipients. One such way is to adjust benefits for high-income individuals who haven't yet claimed in various ways—something that has already considered by lawmakers. Individuals with high incomes in the benefit formula might see a gradual reduction in their replacement rate, dropping from 15 percent to five percent over five years.

Those above median income could experience a reduction from 32 percent to 10 percent. Alternately, limitations on the growth of the initial benefit for those at the taxable maximum ($160,200) might be implemented. Another option is a means test that eliminates benefits for individuals with high incomes or substantial assets.

The AAA also floats the idea of incrementally increasing the full retirement age, which is the age at which beneficiaries become eligible for 100 percent of their earned benefits. Originally set at 65, it has moved to 67 based on changes made in 1983. Further adjustments could be made to to account for longer life spans and careers, potentially raising the age by one month every two years or two months per year for 12 years. If implemented promptly, these changes could address three percent to 10 percent of the 2034 shortfall. Measures to protect individuals with low incomes and shorter life spans who may not be able to work as long could be incorporated.

Modify the annual cost-of-living adjustment by adopting the chained consumer price index in another way to help the SSA solve its problems. This would result in a decrease of approximately 0.3 percentage points in benefit increases each year, according to the report, and could cover 13 percent of the projected 2034 shortfall. An alternative proposal involving the consumer price index for the elderly (CPI-E) would increase annual benefit adjustments by an average of 0.2 percentage points, according to the report, with costs rising by about eight percent of the 2034 shortfall.

According to a poll conducted exclusively for Newsweek by Redfield & Wilton Strategies, 28 percent of those asked strongly agreed with the statement: "The Social Security System needs to be reformed". The poll was conducted on December 8 among a sample population of 1,500 eligible voters in the U.S.

Another Newsweek article in which Americans were asked to give their opinions on the SSA found many had differing opinions on how to fix what is considered by some to be a broken system. A majority of readers who wrote to Newsweek said they were in favor of reforming the system, with many saying it was "obviously" necessary.

Newsweek has contacted the Social Security Administration for comment via email.