Question

Briefly describe some of the proposals to change the current Social Security system in order to improve its long-term financial viability. What do you think should be done to “fix” Social Security and why?

Answer 1

As a result of changes to Social Security enacted in 1983, benefits are now expected to be payable in full on a timely basis until 2037, when the trust fund reserves are projected to become exhausted.1 At the point where the reserves are used up, continuing taxes are expected to be enough to pay 76 percent of scheduled benefits. Thus, the Congress will need to make changes to the scheduled benefits and revenue sources for the program in the future. The Social Security Board of Trustees project that changes equivalent to an immediate reduction in benefits of about 13 percent, or an immediate increase in the combined payroll tax rate from 12.4 percent to 14.4 percent, or some combination of these changes, would be sufficient to allow full payment of the scheduled benefits for the next 75 years.

Since the inception of the Social Security program in 1935, scheduled benefits have always been paid on a timely basis through a series of modifications in the law that will continue. Social Security provides a basic level of monthly income to workers and their families after the workers have reached old age, become disabled, or died. The program now provides benefits to over 50 million people and is financed with the payroll taxes from over 150 million workers and their employers. Further modifications of the program are a certainty as the Congress continues to evolve and shape this program, reflecting the desires of each new generation.

This article describes the financial status of the Social Security program, including an analysis of the concepts of solvency and sustainability and the relationship of Social Security to the overall federal unified budget. The future is uncertain in many respects, and based on new information, projections of the financial status of the Social Security

program vary somewhat over time. What is virtually certain is that the benefits that almost all Americans become entitled to and most depend on will be continued into the future with modifications deemed appropriate by their elected representatives in the Congress.

Look for these six proposals

1. Raise the full retirement age.

Congress already made this fix once, when it bumped the full retirement age to 66 for people born from 1943 to 1954 and to 67 for people born in 1960 or later. Given that life expectancies continue to increase and that people are working longer, raising the full retirement age to, say, 68 or 69 (in other words, a benefit cut) makes sense, says Biggs. A variation of the idea indexes the full retirement age to increases in longevity rather than raising it according to a set schedule.

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2. Raise the earnings cap.

In 1983, when the earnings cap was $35,700, it captured 90% of all wages; the cap, which rises each year as wages rise, is now $118,500, but rapid wage growth among high earners means the tax applies to about 85% of all wages. Raising the cap over the next several decades to cover 90% of all wages (a proposal that would affect about 6% of earners) is an easy fix that most people support, says Hoagland.

SEE ALSO:10 Things You Must Know About Social Security

Eliminating the cap is another matter. With this option, favored by a majority of respondents in a recent survey by the National Academy of Social Insurance (NASI), taxes would go up significantly for people at the high end of the earnings spectrum. (Imagine the ding on Kobe Bryant’s full salary and you get the idea.) Benefits for high earners would also go up, but not by as much as they paid in, because of the nature of Social Security’s benefit formula (more on that below). The prospects for removing the cap? Almost nil, says Hoagland.

3. Tweak the benefits formula.

Social Security benefits are based on workers’ highest earnings over 35 years, adjusted for wage growth. But the system uses a progressive formula that replaces a higher portion of income for lower earners than for high earners. Changing the formula to reduce benefits across the board is a nonstarter, says MacGuineas. “It makes much more sense to protect people who depend on the program and ask people who need it less to get less in benefits.” Among the options: Maintain the same replacement rate for low earners—say, the bottom 30%—and reduce benefits for earners above that level on a sliding scale. “We want the program to be strong for low-income people who are too poor to save and don’t get pensions at work,” says Biggs. “There’s no reason upper-income people can’t save more for retirement.” As for eliminating benefits for high earners, that idea would change the concept of Social Security as an earned benefit and has never generated much support.

4. Adjust the cost-of-living calculation.

Currently, Social Security benefits rise along with annual increases in the consumer price index. Economists have suggested that another price index, known as the chained CPI, more accurately reflects how consumers react to price rises—that is, by subbing hamburger for flank steak or chicken for beef. Switching to the chained CPI would lower the annual increase for inflation by an estimated 0.3 percentage point, according to a report by the American Academy of Actuaries, and reduce about one-fourth of the Social Security deficit. The idea, endorsed by several bipartisan panels as well as President Obama, will probably be part of any future discussion, says Biggs. It is the only solution likely to be adopted that would affect current as well as future beneficiaries.

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5. Raise payroll taxes.

One obvious way to fix Social Security is to have workers pony up more. Boosting the tax by a few percentage points (split evenly between workers and employers) would solve the problem immediately, whereas a gradual hike of 0.1 percentage point a year over 20 years would minimize the pain for workers, whose real wages would presumably grow at a faster rate.

6. Increase benefits for some people.

Amidst talk of raising revenues and cutting benefits, this proposal stands apart: boosting benefits for vulnerable populations. Suggestions include creating a minimum benefit that would keep longtime low earners above the poverty level, increasing benefits for the very old and extending the age at which dependents lose survivor benefits. Groups with representatives from both sides of the political debate have shown a willingness to consider such targeted increases. Expect them to be part of an overall deal.