How can the pending Social Security shortfall be fixed most easily? Raising the amount of money on which workers and employers pay Social Security wage taxes from the current cap of $113,700 is the solution many people find the most palatable.
Sen. Tom Harkins, D-Iowa, proposed a bill last spring that would eliminate that cap, and his plan is currently getting a lot of retirement planning support nationwide.
Raising the wage cap seems like a simple solution, but it has flaws. For one thing, it doesn't solve the problem unless the benefits that high earners get for their additional payroll taxes are eliminated.
Today, workers who reach full retirement age get 15 cents in Social Security for every $1 that they have earned above $4,768 per month up to the Social Security tax wage cap. If the cap is raised so workers and their employers pay taxes on earnings above that cap, but higher-paid workers don't get any additional benefits for those taxes, then Social Security is fixed -- indefinitely solvent.
But that change means "Higher earners pay a tax and get absolutely nothing for it," points out Donald Fuerst, senior pension fellow for American Academy of Actuaries. That makes the change a hard sell. For one thing, the decision-makers are among those who would pay more.
Sen. Tom Harkin, D-Iowa, proposed a bill last spring that would eliminate the cap on wage taxes and after a five-year phase-in, levy taxes on all wages with no cap -- but with a twist. Harkin's proposal adds another benefit calculation category so people who earn more than the 2013 wage cap of $113,700 would get 5 cents in Social Security for every dollar on which they and their employers are taxed above that amount. A spokesman for Harkin's office says, "That's as low as Sen. Harkin wants to go. He wants people to get something for every dollar they put in. That's what separates Social Security from an entitlement plan."
Harkin's proposal also would change the way the Social Security cost of living adjustment is calculated to the consumer price index for the elderly, or CPI-E, which is believed to better reflect increasing health care costs.
In all, Harkin's bill would initially increase the average Social Security benefit by $70 per month, a significant improvement for anyone who is dependent on Social Security.
Harkin's bill wouldn't totally fix Social Security, although it would make it solvent through 2049. Someone who is 62 and eligible to collect Social Security today would be 98 at that point.
Fuerst, who has studied a variety of ways to make Social Security solvent, thinks Harkin's proposal doesn't go far enough. A fairer and more effective plan, he says, would be to simultaneously raise retirement ages, adjust how benefits are calculated, and raise the wage tax. He also advocates making these changes soon.
"Addressing this now offers many more options to fix the problem, and it enables more people to share in the added costs," he says.