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The American Academy of Actuaries is the nonpartisan professional organization for actuaries in the United States. Actuaries are risk professionals who quantify and assist in managing risk, and apply their expertise and knowledge to a wide range of problems facing people in their everyday lives and businesses. In their work of estimating the costs of uncertain future events, actuaries utilize objective data in their modeling of risk.

CHANGING SOCIAL SECURITY’S FINANCING

Approximately 85 percent of Social Security’s funding currently stems from payroll taxes on earnings of most workers. Employees and employers each pay a tax of 6.2 percent of an employee’s wages (Federal Insurance Contributions Act [FICA] tax), while self-employed workers pay the entire 12.4 percent (Self-Employment Contributions Act [SECA] tax). The rest of the program’s income comes from taxes on Social Security benefits and investment earnings of the trust fund.

Should the Payroll Tax Be Increased?

Payroll taxes are limited on annual earned income—called the taxable maximum, which is $128,400 in 2018—and do not apply to investment and other non-wage income. By way of illustration, if Social Security were to be made solvent over the next 75 years by only changing payroll taxes rates, it would require an immediate increase of 2.78 percentage points. Few are suggesting this course of action because it would place a large burden on employers and workers, especially those earning less than the taxable minimum. Gradual, small increases in payroll taxes could increase Social Security’s income while reducing the burden on employees and employers.

Should the Limit on Taxable Earnings Be Raised?

Some experts support raising, or even eliminating, the taxable maximum limit as a way to increase Social Security revenues. Advocates cite a disproportionate tax burden on lower-income workers, who pay an equal or higher portion of their total income to Social Security than wealthier taxpayers. Some oppose increasing burdens on any taxpayers regardless of income and assert that the resultant revenue raised would be relatively small compared to other proposals.

 

When the taxable maximum structure was most recently changed in 1982, it was set to cover 90 percent of earnings. Income for top earners has outpaced wage increases for the rest of the population, resulting in more wages that are above the taxable maximum levels and pushing the percent of earnings covered to approximately 83 percent. Proponents suggest that the ratio of taxable earnings to covered earnings should be restored to 90 percent. Opponents suggest that increases in the taxable maximum would simply result in behavior changes that negate the policy change.

The Academy’s Social Security Game

Explore options for Social Security reform and how changes will affect younger workers, retirees, and the program’s long-term health.

Should the Taxpayer Base Be Expanded?

Some federal, state, and city employees do not pay Social Security taxes because they are covered by a public retirement system. It has been argued that requiring these workers to pay into Social Security, and later collect benefits, could add revenues to the program and reduce the long-term deficit.

Should the Trust Fund Assets Be Invested Elsewhere?

Social Security’s trust fund assets are invested almost entirely in non-marketable, special-issue U.S. government securities that represent loans to the U.S. Treasury’s general fund. The bonds pay market rates of interest. Some have advocated that greater returns could be achieved, on average, in the stock markets.

Should General Revenues Be Raised?

Social insurance programs in many other countries receive some financing from general taxes, and that approach could help with Social Security’s solvency challenge. Such an undertaking would require raising income taxes or raising revenues elsewhere, such as creating a national value-added tax or others. However, it has been argued that such proposals could compromise Social Security’s basic principle of a self-supporting program that is financed by its participants.

Should Individual Accounts Be Created?

Some reform proposals would allow workers to accumulate contributions in individual accounts under Social Security as a source of retirement income. Supporters say workers could exert more control over their accounts, obtain better returns on their contributions, and reduce the burden to future generations. However, the establishment of individual accounts within Social Security would not by itself address the program’s financial problems.