Related topics: Social Security, retirement planning, savings, spending, taxes
The Social Security program faces a long-term financing shortfall. The trust fund's reserves are projected to cover payments through 2037; after that, there would be sufficient resources to pay about three-quarters of scheduled benefits. For full checks to be issued, there must be modifications to either the program's financing or its benefits structure.
A report (.pdf file) recently issued by the Senate Special Committee on Aging outlines policies Congress could institute to lower or eliminate Social Security's projected deficit. Options include tax increases, benefit cuts and program tweaks that could be implemented separately or in combination.
"Many members of the Committee, including myself, do not support and actively oppose many of the options," wrote committee Chairman Sen. Herb Kohl, D-Wis., in the report.
Here's a look at possible Social Security fixes:
Reduce benefits. If Social Security payouts were reduced by 3% for new beneficiaries beginning in 2010, about 18% of the funding shortfall would be eliminated. A 5% benefit cut would reduce the deficit by 30%.
Alternatively, reductions could be more gradually phased in, and those with low lifetime earnings could be exempted.
Raise the retirement age. The Social Security eligibility age for unreduced retirement benefits ranges from 65 to 67, depending on the worker's year of birth. Payouts are reduced for those who claim benefits between age 62 and their full retirement age.
Various proposals have been made to push back the retirement age. One is to accelerate already announced plans to raise the retirement age to 67. Another would further increase the full retirement age to 68 or even 70. Others propose indexing the full retirement age to keep up with changes in longevity.
Each of these switches would eliminate less than a third of the projected deficit.
Require bigger contributions from workers and employers. Workers and their employers pay 6.2% of earnings up to $106,800, or as much as $6,622 per year, into the Social Security system. Self-employed workers are required to pay 12.4% of their pay, up to the same cap.
If the contribution rate were increased by to 7.3% of earnings, Social Security's projected deficit would be eliminated.
Using this fix, a worker making $43,451 in 2010 would face a tax increase of $478 a year, or $9.19 a week, as would the employer.
Boost future contributions. Taxes don't need to be increased immediately because there is enough money in the Social Security trust fund to pay out scheduled benefits. Tthe Social Security tax bite could be increased from 6.2% to 7.2% for workers and employers in 2022, for example, and to 8.2% in 2052, which would completely eliminate the shortfall.
Alternatively, taxes could be ramped up by .05% annually for 20 years, which would shrink Social Security's projected deficit by about 69%.
Tax as needed. Social Security contribution rates could be designed to increase as funds are needed and be reduced when there are surpluses.
Additionally, efforts to collect unpaid Social Security payroll taxes could be enhanced.
