Question

What can be done to improve the financial health of Social Security? Describe the benefits and drawbacks of the major proposals to change Social Security as outlined in the reading, “The Future of Social Security: Proposals You Should Know About.” Which course of action do you favor?

Answer 1

Social security program is based on contributions that workers make into the system. While you're employed, you pay into Social Security; you receive benefits later on, when it's your turn to retire. Contributions take the form of the Federal Insurance Contributions Act (FICA) taxes that are withheld from most paychecks.

1. Increase the payroll tax rate for workers slowly over 50 years.
2. Lift the payroll tax cap completely for employers. “If they want to pay high earners millions, that’s fine, but make them pay wage tax on those salaries,” Kingson says.
3. Adopt the consumer price index for the elderly, or CPI-E, which unlike the current CPI for urban wage earners or clerical workers, or CPI-W, or the proposed chained CPI, recognizes the rising cost of health care.
4. Restore Social Security’s ability to offer good customer service by extending office hours and rehiring workers who were laid off.
5. Increase benefits for the very poor. Give caregivers special credits, and give students who lose their parents benefits to age 22, so they can use them to pay for college.

Below are the Prons and Cons of the major proposals to change Social Security as outlined in the reading, “The Future of Social Security: Proposals You Should Know About":

Raise the Full Retirement Age

Pro: People are living longer than ever before, and the full benefits age should be increased. Otherwise, recipients will spend an ever-greater amount of their lives living in retirement, which we simply cannot afford.

Con: Raising the full retirement age is a benefit cut no matter what age you begin taking benefits. The increase from 65 to 67 already in law cuts benefits by 13 percent. Low-earning workers have seen little or no gains in longevity.

Longevity Indexing

Pro: Indexing the Social Security retirement age is a fair way to handle the fact that Americans are expected to live longer in the future.

Con: To index benefits for longevity would unfairly cut benefits for almost everyone. Low-earning workers and other disadvantaged groups have seen little or no gains in longevity. Cutting benefits for everyone just because well-off Americans are living longer would be profoundly unjust.

Increase the Payroll Tax Cap

Pro: Lifting the cap to cover 90 percent of all earnings is sensible and fair. Only 6 percent of workers earn more than the current cap of $110,100. It is fair for top earners to pay more into Social Security, and they would get a bit more in benefits.

Con: In general, increasing taxes is a serious mistake. It reduces the amount that Americans have to spend on their family’s food, housing, clothes, education, etc. This bad idea would cause a hefty tax increase for 7 middle-income taxpayers while not affecting the rich. It would especially hurt the self-employed and certain smaller business owners.

Eliminate the Payroll Tax Cap

Pro: Eliminating the tax cap would make Social Security’s financing more fair. Only 6 percent of workers earn more than the current cap of $110,100. They would pay on all their earnings throughout the year just as everyone else does, and would get a modest increase in benefits. This change alone would just about eliminate Social Security’s long-term financing gap.

Con: At first blush, the idea that people should pay Social Security taxes on all of their earnings seems both fair and attractive. However, this “solution” would cause huge Social Security checks for very high-income people.

Reduce Benefits for Higher Earners

Pro: In coming years, when Social Security won’t have enough payroll tax money to pay full benefits to everyone, it seems only fair to pay full benefits to lower-wage workers and lower benefits to those who had higher earnings.

Con: These proposals would actually cut benefits for middle-class workers making as little as $35,000 a year. They are not “high earners.” Benefits are already modest.

Increase the Payroll Tax Rate

Pro: Gradually increasing the Social Security tax rate from 6.2 to 7.2 percent over 20 years makes good sense. Most Americans say they would rather pay more than see Social Security cut. It could pay for much-needed improvements and keep Social Security strong for the longterm.

Con: Increasing Social Security’s payroll tax rate is a bad idea that would increase everyone’s taxes, no matter their income. Economists have known for decades that if the cost of employees gets too great, employers will start to replace them with machines or move to locations with lower taxes.

Tax All Salary Reduction Plans

Pro: Congress should complete a reform it launched in 1983 when it treated workers’ contributions to 401(k) salary reduction plans as earnings that are taxed and counted toward Social Security benefits. Extending the same treatment to other such plans would be consistent enough.

Con: This would be a case of robbing Peter to pay Paul. Changing the tax treatment of salary reduction plans would increase the cost of health care and other employee benefits because the tax savings help to offset the employer’s cost of operating the plans.

Cover All Newly Hired State and Local Government Workers

Pro: Social Security works best for everyone when it covers everyone. Workers gain seamless, portable life and disability insurance as well as basic retirement income protection. Any employer-provided pensions are then added to Social Security.

Con: Making newly hired workers join Social Security would increase revenue now, but eventually the program would have to pay these workers benefits. That would make Social Security’s financial problems even worse.

Increase Number of Years Used to Calculate Initial Benefits

Pro: Increasing the number of years an individual must work to qualify for full Social Security benefits recognizes that most people are living and working longer than they did in the past. Today’s method produces a skewed picture of an individual’s full employment history and inaccurate Social Security benefits.

Con: This proposal would reduce benefits the most for people who need them most: women and lower-income, less-educated and minority retirees. It would reduce benefits not only for retired workers, but also for their dependents and survivors.

Begin Means-Testing Social Security Benefits

Pro: In an era of scarce resources, Social Security can’t continue to pay benefits to all retirees regardless of what other retirement income they have. Instead, the program should provide monthly benefits only to retirees who have less than a certain amount of non-Social Security annual income.

Con: Means testing would change Social Security from an earned right to welfare. It would penalize you if you saved or earned a pension because that income would reduce your Social Security. And it would cost more to administer. The government would have to routinely check your income and assets in order to adjust your benefit. It means breach of faith with working class Americans

Below are course of actions to fix it as per me:

Switching the Cost Of Living Calculation

Currently, Social Security's cost of living adjustment is determined by using the traditional Consumer Price Index. The "chained" CPI, however, attempts to reflect how consumers change their spending habits in response to price changes—buying chicken when the price of steak goes up, for example. While this will mean smaller benefits, it could particularly hurt older beneficiaries.

Means-Testing

It sounds like an easy fix—shift money from the wealthiest retirees to the recipients who need it most—but in the long run, the politics of means-testing might jeopardize the program's popularity. Making Social Security more redistributive takes away from one of its basic premises: that workers who pay in more over their working lifetimes get more out of it in retirement.

Raising the Retirement Age

Proponents of this solution point out that life expectancies have grown, meaning that beneficiaries receive benefits for longer and thus can and should also work longer. Raising the eligibility age for full benefits is a solution that makes logical sense but could mean hardship for some.

Raising the Payroll Tax Cap

Currently, only the first $106,800 of annual wages are subject to the payroll tax. Raising that cap and having high earners pay a larger share into the system could help to close Social Security gaps. The political problem with this option is similar to that with means-testing: it's redistributive, albeit in a different way. As there is a cap on Social Security benefits, this would mean that some people could wind up paying much more into the system but receiving the same benefits as other, less-wealthy beneficiaries.

Privatizing the System

As current workers' payments into the system go to current retirees, a shift to privatization could hurt those beneficiaries. Recent sharp losses in the stock market have also cut into the popularity of such an approach.