Social Security: Solvency Issues and Possible Solutions

Arjun Mudhar

Professor David Russell

Fin 336

30 November 2017

Social Security: Solvency Issues and Possible Solutions

The Social Security Act was added to law in 1935, subsequently resulting in a public program we know as Social Security. Social Security is a form of social insurance which provides income to eligible individuals or families in the following categories: retirement, survivor, and disability. In other words, economic uncertainty can come in forms such as inability to work due to old age and/or disability, therefore Social Security was put into place to offer general welfare benefits to those that that need it. This program operates based on contributions that employed workers put into a Social Security trust fund, which funds payments to beneficiaries who are already retired, disabled, etc. As time passes, employed workers will eventually retire and at that point collect benefits from Social Security and the cycle continues. It’s important to note that Social Security was never intended to be the sole source of income when upon retirement.

The financial status for this program can be analyzed by focusing on the solvency of Social Security trust funds which contain a feature in which they are unable to borrow money if asset reserves are depleted. Two examples of these Social Security trust funds include The Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI). In other words, if these trust funds run out of assets, they will be unable to pay scheduled benefits. Given the trustees’ assumptions, the OASI and DI trust funds are projected reach exhaustion in 2037, thus presenting the issue of insolvency.

There are several solutions to this issue very complex issue. One method involves raising Social Security payroll taxes. The current Social Security tax rate is 6.2% for both the employee and employer, making for a total 12.4%. Through steadily raising this payroll tax by 2%, it would be enough for this program to remain solvent for the next 75 years. Its believed that all workers would be affected by an increase in payroll tax when employers shift their share of the increase by reducing wages. Its important to note another issue with this plan, which is that there is an income cap for this payroll tax. This cap is currently stands at $127,000, so those who make more than $127,000 annually, don’t pay tax on that excess income. Another solution involves a gradual elimination of this cap would extend reserves for a significant number of years. Pursing this option would result in top earners paying more into Social Security. But this would lead to a significant increase for Social Security while affecting a smaller proportion of those paying for it.

Though both of these solutions come with some shortcomings,