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July 01, 2014

Social Security: Reform or Perish?

Zach Chapman

(Note: The pdf for the issue in which this article appears is available for download: Bifocal Vol. 35, Issue 6.)

Background on Social Security Program

Social Security retirement benefits have had great success at keeping older Americans out of poverty. Now, however, the system is at risk of running short of funding and it is important that steps be taken to ensure the long term solvency of Social Security. Funding for Social Security comes from a 12.4% payroll tax that is split evenly between an employer and an employee. The funds generated from this tax are then paid into the Old-Age and Survivor’s Insurance (OASI) Trust Fund. Social Security retirement benefits are paid out of the trust fund.1

Reasons for Social Security Reform

Unless changes are made in the system, it will run short of funds to pay retirement benefits in less than 20 years. Projections are that obligations to pay benefits will exceed incoming revenue in 2020, resulting in needing to draw on the trust fund, and the trust fund will be exhausted sometime between 2033 and 2035. The projected result that only about 75% of the funds needed to pay benefits would be available at that time. There are many factors contributing to Social Security’s insolvency. Two of the major issues are retiring baby boomers and people living longer. There are a few types of reforms that should be made now, instead of later, to help ensure the solvency of Social Security.2

Reform Proposals

On average, people are living longer resulting in Social Security paying benefits for a longer period of time. Thus, a prime reform approach is increasing the full retirement age. Full retirement age was set at 65 when Social Security started in the 1930’s and is in the process of being raised to 67. Over the same period of time, average life expectancy has increased by nearly ten years. An increase in retirement age can be phased in gradually, as has been done in the past, and will vastly improve the solvency of Social Security. Increasing the retirement age contributes to Social Security’s solvency in two ways: (1) it delays the start of benefits, resulting in a short-term savings of fewer beneficiaries being eligible for benefits each year as the change being phased in, and (2) as beneficiaries draw benefits for few years, more money is left in the Trust Funds.3 The Social Security Administration (SSA) released data indicating that increasing the full retirement age to 69 and then proceeding to index the full retirement age for increases in life expectancy would reduce the projected trust fund deficit by 44%.4

There are two proposals for increasing tax revenue. First is raising the payroll tax and second is raising or eliminating the cap on earnings subject to Social Security payroll tax. Raising the payroll tax will bring more money into the Trust Funds improving their solvency. One version of this supported by the AARP is a gradual increase of 0.05% in the payroll tax beginning in 2017 and running through 2036. On average, this minimal tax increase would cost workers about 50 cents per week. This increase “would eliminate nearly two-thirds of the program’s projected 75-year shortfall.”5 Implementing this tax over time would allow more people to benefit from the increase and prevent benefit cuts.

The second revenue proposal is to increase revenue by eliminating the cap on the amount of earnings subject to payroll tax. Currently only the first $117,000 in earnings are subject to tax. If the cap were eliminated, more revenue would be generated. Under the current system, lower income workers contribute a higher percentage of their income to Social Security then high income workers; eliminating the cap would even the burden and improve the solvency of the system.6 Variations on this have been proposed that would keep the current cap, and start collection of payroll taxes in very high wage earners, with the tax kicking back in on wages above $400,000 per year.

The third proposal is reducing payments for high-income beneficiaries. This would be done by applying a means test or an “affluence test.” Unlike low-income individuals, high-income beneficiaries do not rely on Social Security as their primary form of income.7 Applying this type of affluence test to high earning individuals is not a new concept, as it is currently done with Medicare Part B, and was accepted without much opposition. Medicare beneficiaries pay a monthly premium to receive Part B medical insurance. Individuals with a retirement income up to $85,000 per year (double that for a married couple) pay the standard Part B premium, and beneficiaries with income above that pay a higher premium, indexed in four steps with the highest rate kicking in for individuals with a retirement income above $214,000 per year.8 A similar model of Social Security would gradually reduce the retirement benefits for retirees with high and very high incomes--retirees who are least dependent on Social Security.

Recognizing the importance of not waiting to address Social Security reform, some members of Congress have tried to propose changes to the current Social Security structure. Social Security reform is something members of Congress need to support as Social Security solvency is important for all Americans. Further, what lawmakers need to recognize is that Americans not only want Social Security, but they do not mind paying for Social Security.9 Additionally, Americans recognize it is crucially important to ensure Social Security’s continued existence and believe the current system could be improved, and they do not mind paying more into the Trust Funds to ensure its solvency.10 Americans want and need Social Security to be solvent. Small changes need to be made now to ensure its solvency. Implementing small reforms now will a crisis later. Some variation or combination of the above proposals will help to ensure that Social Security is there for today’s generation and future generations.

An expanded version of this article is available online.

[1] Social Security Administration, Historical Background and Development of Social Security, (last visited June 27, 2014).

[2] Andy Landis, Exposing the Social Security solvency hype, MarketWatch (June 12, 2013),

[3] Virginia Reno & David John, Reforming Social Security, AARP Public Policy Institute (June 25, 2012),

[4] Increasing retirement ages, Urban Institute Program on Retirement Policy (last visited June 30, 2014),

[5] Reno & John, Reforming Social Security at 1.

[6] Id.

[7] Options for strengthening Social Security, The American Academy of Actuaries (last visited June 30, 2014),

[8] Part B costs, (last visited June 30, 2014),

[9] See generally J. V. Tucker, V. P. Reno, & T.N. Bethell, Strengthening Social Security: what do Americans want?, National Academy of Social Insurance (Feb. 2013), (finding regardless of political party affiliation, a large majority of Americans do not mind contributing to Social Security because they find it beneficial for themselves, their families, retired Americans, disabled persons, and widows or children of deceased persons).

[10] Id. 

Zach Chapman

About the Authors:

Zach Chapman is a rising 3rd year law student at Villanova University School of Law in Villanova, PA. Mr. Chapman received a B.A. in Economics and a B.A. in Political Science from the University of North Carolina at Chapel Hill. Mr. Chapman was a Summer 2014 intern with the ABA Commission on Law and Aging.