Trustees for Social Security and Medicare issued their annual reports today and the numbers aren’t pretty. Social Security will run out of money in 2040 and Medicare in just 12 years – in 2020. The first of the baby boomers – those born in 1946 – turn 60 this year, with the last of them – those born in 1964 – turning 42. Since 2004, Medicare has been paying out more in benefits than it is taking in via taxes. Social Security will hit that point in 2017.
What is it going to take in order for something to be done about these programs on which so many depend? Yes, I’m aware that Social Security was never intended to be the sole source of retirement funds. But here is a reality: for many people, this is all they will have. Gone are the days of company-paid retirement plans. The responsibility for saving for retirement has completely shifted to the employee, who often has no idea how to do this. I’ve seen folks put all of their 401(k) contributions into money market funds, which often pay less interest that bank savings accounts and offer no opportunity for growth. Many people are overwhelmed with the array of options for their company’s plans and choose nothing.
Then we have the self-employed, many of whom are struggling just to pay the self-employment tax, much less being able to contribute to a retirement plan. (“Self-employment tax” is Social Security and Medicare for the self-employed with one major difference: self-employment tax includes both halves of the Social Security and Medicare. So a self-employed person pays 12.4% for Social Security and 2.9% for Medicare.) With more and more people becoming self-employed, this problem will only get worse as time goes on.
So what are we to do? I can think of a few things to shore up the contributions:
- Make all wages subject to Social Security. Remove the earnings cap. Currently, only the first $94,200 is subject to Social Security. (There is no earnings cap on Medicare.)
- Tax all Social Security payments after original contributions are returned. Currently, as much as 85% of Social Security benefits are taxable. Let people get back their contributions tax free and then let them pay taxes on the remainder. This is closer to the way that most other retirement plans work. Plus, it reminds people that they are no longer collecting their money, they are now getting mine.
- Put the income taxes collected on Social Security benefits back into the Social Security trust fund.
- Means testing of benefits after the orginal contributions have been returned. My understanding is that the average recipient gets back all of their contributions plus that of their employers, in about 3 years.
- Consider an increase in the rate. It’s been a number of years since the rate was increased.
Like it or not, Social Security is something that many people rely on. It’s past time to make it solvent.
VIVIAN J. PAIGE | All Politics is Local 