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Om Makwana

Reconsidering Social Security

Background and Context

Introduced during the New Deal, under the FDR administration, Social Security is a

program that serves as a safety net for the elderly, survivors, and disabled. Currently, there are

over 72 million Americans that are receiving Social Security benefits.1 In order to qualify for

Social Security benefits, workers must be at least 62 years old and have contributed to the system

for 10 years or more. However, to ensure higher monthly payments, workers have to wait until

70 years old. The way payments are collected is through calculating the worker’s average

indexed monthly earnings (AIME) during their highest earning years.2 Social security operates as

an insurance program, with workers contributing through income taxes. Current workers’

contributions fund the benefits received by current retirees, and the cycle continues to serve a

safety net for Americans throughout their lives.

However, there are issues with Social Security benefits. By 2034, the trust funds which

have been supplementing Social Security payrolls are projected to be depleted.3 In the past, there

was an excess of reserves in the Social

Security Trust Fund, however as the US

population continues to age, the trust fund

will deplete.

Figure 1. Projected Social Security

Income and Cost Rates, as a Percentage of

Taxable Payroll, 1990-2095

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When this happens, the beneficiaries of Social Security will only receive 76% of their monthly

incomes. In addition to the aging population, there is a decreasing number of workers that will be

paying for an increasing number of beneficiaries, due to the decline in birth rate following the

baby boom after World War II.4 In the graph above, the costs of Social Security are expected to

increase at a rapid pace, which can be attributed to the ratio of workers to retirees declining from

3:1 to 2:1.5 With the depletion of the trust fund, it does not mean that Social Security is

“bankrupt.” It just means that benefits will drop; benefits relative to retirees before 65 would

drop from 37% to 27%.

The depletion of the trust fund isn’t the only issue; Social Security hasn’t been changed

since March 1983. When Social Security was first introduced, the life expectancy for men and

women was 59.9 and 63.9 years, respectively. However, the retirement age in 1935 was 65.6 This

meant that the majority of people paying into Social Security didn’t live long enough to reap the

benefits. This explains why the Social Security Trust Fund has been in an excess of funds.

However, over time, life expectancies have increased significantly due to developments in

healthcare and quality of life. When Social Security was amended in 1983, the age of retirement

was increased from 65 to 67, but life expectancy was 74.6. Now, the age of retirement is still 67,

but the life expectancy pre-covid was 78.8. Social Security hasn’t been amended to reflect better

healthcare and quality of life. As the life expectancy continues to rise, contributors decline, and

beneficiaries rise, changes to Social Security will have to be made.

Stakeholders

There are three main stakeholders in regards to Social Security: contributors,

beneficiaries, and policymakers. Contributors include employees and employers, who both have

to pay 6.2% of their annual income up to $168,600; individuals who are self-employed pay the
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full 12.4% because they are considered both the employer and employee.7 Beneficiaries include

workers who are at least 62 years old and contributed to the system for 10 or more years. Within

the beneficiaries there are many subgroups. Spouses and dependents of beneficiaries may also

receive benefits based on their relationship to the primary beneficiary. Another subgroup is

disabled recipients. The Social Security Disability Insurance (SSDI) provides benefits to

individuals who are unable to work due to a qualifying disability. The last subgroup is survivors,

who are the surviving spouses and children of deceased workers who were previously covered by

Social Security. Policy makers include legislators in congress who have the power to make

amends to the Social Security Programs. A reason Social Security hasn’t been amended is due to

both policy makers and beneficiaries. It is known that the older generations vote more than the

younger generations, so policy makers are not going to make any changes that they think would

hurt the beneficiaries.

Future Policy

1. The gradual easing out of the Social Security Policy

Although not a very popular option, this policy is still one that could happen in the future.

The current Social Security program is unsustainable in the long term due to the

demographic shifts. The aging population of the United State is putting a strain on the

current contributors of Social Security, and in the future the trust fund will run out in

2034 if no changes are made to the policy. Additionally, critics of Social Security

emphasize individual responsibility. They argue that people should be in charge of their

own retirement savings and not rely on government programs, which ultimately rely on

taxpayers. The average American makes around $59,383 per year.8 If you take 6.2% for

Social Security and divide that by 12, you get how much the average American pays in
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Social Security tax each month. This number comes up to be around $306.82 per month.

Furthermore, if Social Security no longer a policy, the average American would have an

additional $306.83 to spend each month. For some families this can be a significant

amount, helping them live a little more comfortably. What each family chooses to do with

their money is ultimately up to them, but the ideal choice would be to invest it. If an

individual chose to invest their money in a mutual fund at 6% for 49 years, which is the

average length an individual works for, they would retire with $1,002,303.25. A rate of

return of 6% is on the lower side, however if the calculation is done at the historical rate

of 8%, $306.82 invested monthly for 49 years would become $1,991,454.86.

2. Increase the Social Security Tax

One way to ensure that the Social Security Trust doesn’t deplete is to increase the tax rate

for contributors. This would effectively ensure that future generations can see the benefits

of Social Security without major cuts. Currently the max an individual can pay in Social

Security each year is $10,453.20 because there is a tax limit.9 Eliminating the tax limit,

would increase the revenues needed to supply the trust fund. This would focus the tax on
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earners over $168,000, which could significantly ensure that Social Security benefits are

not cut for future generations. By targeting earners over $168,000, it helps distribute the

burden of funding more equitably. The current tax limit means that higher earners

contribute a smaller percentage of their income to Social Security compared to lower

income earners. By removing this cap, a more progressive system would be created

where individuals contribute based on their ability to pay, helping mitigate disparities in

wealth and income. Strengthening Social Security through contributions from higher

earners can bolster retirees with a source of income, in turn, stimulating the economy.

3. Increase the Retirement Age

Increasing the retirement age is another potential strategy to address the financial

challenges facing the Social Security Trust Fund. The full retirement age for Social

Security benefits is 67 for those born after 1959.10 The official age of retirement hasn’t

been changed since 1983, and since then the life expectancy has increased due to better

healthcare and quality of life. By increasing the retirement age, it would help ensure the

trust fund continues to stay in the positives for years to come. Furthermore, increasing the

retirement age encourages the older population to work longer, which can help them have

more retirement funds. As a country, this would increase productivity, as more people are

contributing to the economy and relying less on the Social Security Trust Fund.

Conclusion

With all policies, there are going to be some refutations. Regarding the first policy of

easing out Social Security, there will be refutations from the elderly. Much of the older

population relies on Social Security as their only source of income, therefore getting rid of the

policy wouldn’t be a viable option in the short term. However, if the policy is eased out, it gives
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the older population time to figure out how to sustain their lifestyles. The major refutation from

policy two would come from taxpayers. Taxpayers don’t want to see more of their income go to

the government, so increasing the Social Security Tax wouldn’t be the most appealing for them.

Additionally, they may argue that if the tax rate is increased once, then what’s stopping the

government from increasing it in the future as healthcare quality becomes better. Not a favorable

policy for the older population, policy three would get the most refutation from the older

population. They wouldn’t want to wait longer to get their retirement benefits, and they wouldn’t

want to work longer in order to sustain their retirement. Another refutation would be that the

older generation might have to work lower income jobs, which tend to be less safe than higher

income jobs. This could have a negative impact on their life expectancy because of the stress

they might gain from working these unsafe jobs.

Social Security may be effective for the current retiree population, but in the future as the

ratio between contributors and retirees continues to go down, changes will be needed to ensure

Social Security benefits are available for future generations. If no policies are enacted in the

future, the amount of benefits for retirees will go down to 76%, and policymakers will receive

backlash from those individuals. However, if other policies are enacted, there will always be one

group that will have refutation. The ball then lies in the hands of policymakers to see who will

then receive the short end of the stick.

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Notes

1. “Monthly Statistical Snapshot, March 2024,” n.d.,

https://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/2024-03.html.

2. Julia Kagan, “Average Indexed Monthly Earnings (AIME): Meaning and Overview,”

Investopedia, October 27, 2023,

https://www.investopedia.com/terms/a/aime.asp#:~:text=Average%20indexed%20monthl

y%20earnings%20(AIME)%20are%20used%20to%20calculate%20a,indexed%20monthl

y%20earnings%20(AIME).

3. Georgia Nabors and Louise Sheiner, “Social Security: Today’s Financing Challenge Is at

Least Double What It Was in 1983,” Brookings, September 18, 2023,

https://www.brookings.edu/articles/social-security-todays-financing-challenge-is-at-least-

double-what-it-was-in-1983/.

4. Alicia H. Munnell and Center for Retirement Research, “SOCIAL SECURITY’S

FINANCIAL OUTLOOK: THE 2021 UPDATE IN PERSPECTIVE,” 2021,

https://crr.bc.edu/wp-content/uploads/2021/09/IB_21-15_.pdf.

5. Ibid

6. “Normal Retirement Age (NRA),” n.d., https://www.ssa.gov/oact/progdata/nra.html.

7. “Contribution and Benefit Base,” n.d.,

https://www.ssa.gov/oact/cola/cbb.html#:~:text=The%20OASDI%20tax%20rate%20for

%20wages%20paid,his%20or%20her%20employer%20would%20contribute%20the.
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8. Usa Today Staff, “Home,” USA TODAY, April 20, 2024,

https://www.usatoday.com/money/blueprint/business/hr-payroll/average-salary-us/#:~:tex

t=How%20much%20does%20the%20average,Q4%20of%202023%20was%20%2459%2

C384.&text=This%20is%20up%205.4%25%20from,was%20making%20%2456%2C316

%20per%20year.

9. “Social Security Tax Limit (Wage Base) for 2024 | SmartAsset,” March 4, 2024,

https://smartasset.com/retirement/social-security-tax-limit.

10. Lorie Konish, “As More Americans Reach 65 Than Ever, Here’s What to Know About

Your Social Security Retirement Age,” CNBC, February 14, 2024,

https://www.cnbc.com/2024/02/14/social-security-retirement-age-how-to-know-when-to-

claim-benefits.html#:~:text=How%20to%20find%20your%20Social,people%20born%20

between%20those%20years.
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Bibliography

“Contribution and Benefit Base,” n.d.

https://www.ssa.gov/oact/cola/cbb.html#:~:text=The%20OASDI%20tax%20rate%20for

%20wages%20paid,his%20or%20her%20employer%20would%20contribute%20the.

Kagan, Julia. “Average Indexed Monthly Earnings (AIME): Meaning and Overview.”

Investopedia, October 27, 2023.

https://www.investopedia.com/terms/a/aime.asp#:~:text=Average%20indexed%20monthl

y%20earnings%20(AIME)%20are%20used%20to%20calculate%20a,indexed%20monthl

y%20earnings%20(AIME).

Konish, Lorie. “As More Americans Reach 65 Than Ever, Here’s What to Know About Your

Social Security Retirement Age.” CNBC, February 14, 2024.

https://www.cnbc.com/2024/02/14/social-security-retirement-age-how-to-know-when-to-

claim-benefits.html#:~:text=How%20to%20find%20your%20Social,people%20born%20

between%20those%20years.

“Monthly Statistical Snapshot, March 2024,” n.d.

https://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/2024-03.html.

Munnell, Alicia H. and Center for Retirement Research. “SOCIAL SECURITY’S FINANCIAL

OUTLOOK: THE 2021 UPDATE IN PERSPECTIVE,” 2021.

https://crr.bc.edu/wp-content/uploads/2021/09/IB_21-15_.pdf.
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Nabors, Georgia, and Louise Sheiner. “Social Security: Today’s Financing Challenge Is at Least

Double What It Was in 1983.” Brookings, September 18, 2023.

https://www.brookings.edu/articles/social-security-todays-financing-challenge-is-at-least-

double-what-it-was-in-1983/.

“Normal Retirement Age (NRA),” n.d. https://www.ssa.gov/oact/progdata/nra.html.

“Social Security Tax Limit (Wage Base) for 2024 | SmartAsset,” March 4, 2024.

https://smartasset.com/retirement/social-security-tax-limit.

Staff, Usa Today. “Home.” USA TODAY, April 20, 2024.

https://www.usatoday.com/money/blueprint/business/hr-payroll/average-salary-us/#:~:tex

t=How%20much%20does%20the%20average,Q4%20of%202023%20was%20%2459%2

C384.&text=This%20is%20up%205.4%25%20from,was%20making%20%2456%2C316

%20per%20year.