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Let's fix Social Security now

A retirement expert argues that common-sense adjustments could eliminate Social Security's shortfall and take it out of the upcoming fiscal policy debate.

By MSN Money Partner Jan 10, 2013 4:08PM

This post comes from Alicia Munnell at partner site MarketWatch.


MarketWatch logoThis is as good a time as any to fix Social Security's financing problems. In fact, Congress' decision to allow the 2-percentage-point reduction in the payroll tax to expire as part of the fiscal cliff negotiations clears the path for restoring full solvency.


Image: Social Security Card (© Scott Speakes/Corbis)Of course, Social Security has not contributed to the deficit in the past and technically cannot in the future because, by law, expenditures cannot exceed earmarked revenues. But Social Security's promised benefits exceed scheduled taxes, creating a financing shortfall that needs to be fixed.


The political climate is daunting for any sensible endeavor. But I can't think of any reason why next year will be better than this year. And we are coming up on the 20th anniversary of evidence of a significant shortfall in the program.


I am particularly sensitive to the date because in 1994, as assistant secretary of Treasury for economic policy, I was handed a draft of the trustees report showing a jump in the long-run deficit from 1.5% to 2.1% of taxable payrolls. As a big supporter of this wonderful program, I was dismayed to have the deterioration in the system's finances occur on my watch.


Restoring balance to Social Security is crucial for the well-being of every worker, because Social Security provides the base of retirement income. The benefits are not large -- about $1,200 per month on average -- but they are indexed for inflation and continue as long as people live.


The only other retirement income for most households will be that produced by assets in 401k plans or other defined-contribution retirement plans. The Federal Reserve's recent Survey of Consumer Finances shows that these assets are modest -- $120,000 for households approaching retirement. If a couple purchases a joint-and-survivor annuity with $120,000, they will receive $575 per month. This $575 is likely to be the only source of additional income, because the typical household holds virtually no financial assets outside of its 401k plan.


The key question is how much of Social Security's financing gap should be closed by cutting benefits versus raising taxes. My view is that retirements are at risk. The need for retirement income is increasing as people are living longer, health care costs are soaring, and two-thirds will need some long-term care.

At the same time, the retirement system is contracting. The Center for Retirement Research's National Retirement Risk Index shows that 53% of households are at risk of not being able to maintain their pre-retirement living standards once they stop working. Given this outlook, while any package will involve some compromise, we should be careful about large cuts in benefits.


Solving Social Security's financing challenge requires some combination of increased revenues and slowing of benefit growth. On the revenue side, some attractive proposals include increasing the contribution and benefit base gradually to a level covering 90% of total national earnings (about $180,000 at current income levels) and gradually eliminating the tax exclusion for group health insurance so that both employee and employer premiums are covered by the payroll (and income) tax.


No one wants benefit cuts, but two possible options include increasing the full retirement age (after it reaches 67) to keep pace with improvements in longevity and adopting a "chain-weighted" consumer price index for Social Security's cost-of-living adjustment. Adverse effects of the COLA adjustment on the low-income or the very old could be offset by increasing the minimum benefit or making a 5% adjustment at, say, age 85.


In short, everyone who cares about retirement security should welcome the restoration of the payroll tax. This change brings the deficit back into manageable territory. Let's take advantage of this opportunity to eliminate the shortfall and really take Social Security out of fiscal policy debates.


Alicia Munnell is the director for the Center for Retirement Research at Boston College.


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Jan 11, 2013 3:08AM

Social security was created during the great depression of the 1930s to address the problem of seniors citizens who were literally starving to death. It was originally designed as a very small tax of 2% from all workers and their employers. It was designed to be a very small payment to cover food expnses and nothing more. It was never meant to take the place of savings or to be the foundations of a retirement plan.


It is a tax, wherin the money is not saved but was to be fully spent on the workers parents/elders/seniors. It is not insurance, it was not meant to be a trust fund. Any other word than tax is just mindless marketing for the weak minded, like adding "a bit of sugar to make the medicine go down".


Almost imediately social security was expanded to cover orphaned children. Specifically young dependent children.


Later and after some debate and with concerns, Social security was expanded to cover with limits, disabled persons.


Social security was and still is a socialist plan that was intended to pay benefits based on needs and not contributions. The cost to buy food is the same if your income is/was $10 or $10,000.


Over decades the plan has deviated to allow greater payments in general and significantly greater payments for those who had higher income. This is one of the reasons for the funding shortfall of the 1970/1980s which resulted across decades of the tripling of the tax to 6%/6% percent that we have today. The second reason for the funding shortfall is longer life spans.


Today we have an ever incresaing, misinformed public, on what social secuirty is meant to do.  It is not meant to pay for housing, medicine, or any other utility bill. Social security does not and will never take the place of personal savings or building equity in things that can be later sold, to support retirement. 


Most cultures expect family, specifically the children of the seniors to care for them. But in America there is little to no enforcement of children taking care of their parents. I know of laws against a deadbeat parent but I know of none against a deadbeat child.

Jan 11, 2013 3:06AM
The idiots that took the money from S.S. should have to pay it back, and/or be charged with theft, money laundering, what ever the case may be.
This is so ridiculous, they screw up, waste our money, and expect us to support them. The only people actually supporting them are the ones that get the favors and/or "gifts". They need term limits, for if  none other than this point, alone.
They need to keep their hands off S.S. & medicare, and concentrate on the waste. Especially, if the waste is in these favors, pork, whatever you call it.
If you propose a bill, keep it about the main subject, only! Add nothing, none of this "If you you vote for this I'll throw this in, to help you", crap. So effin' tired of  hearing about other add-ons, after the fact.
Again, next election, I'm voting against the incumbent, dem or repub., doesn't matter.

Jan 11, 2013 3:01AM

I am a conservative, but some things need to be addressed, no income caps on SSI.  EVERYONE on SSD gets audited to see if they are full of ****.  Not offense, but I know people who are not and collecting...  Mandatory Drug Test for anyone on assistance (SSD) Audits for SSI. 

Jan 11, 2013 2:55AM

   what  was   this  recent  payroll   tax  cut?   was  this  not  money that  was   SUPPOSED  to  be  put  into  social  security   but   was  not..... and  where  were  the  frauds   from  A.A.R.P.  when  this  nonsense    was  going  on........ahhh  yes   the  people  that  run  A.A.R.P.   are  leftist  frauds

Jan 11, 2013 2:51AM
Please stop with the banter on SS.  Its easy LIFT ALL CAPS on income, wow you make 106800 you dont have to pay anymore.... f that pay no matter what and at the same percentage.  PS I am a fiscal consevative, and I dont care if SS goes away for my generation.  I am 37 years old
Jan 11, 2013 2:27AM
Social Security was never designed to do more than to save $$$ for people when they retire.  Beginning and ending of entire program.  If the payments to orphaned children and disability were discontinued there wouldn't be a problem.  These two parts of the program belong elsewhere. The government REQUIRED working taxpayers to donate to social security with the promise that the $$ would be returned.  So, gimme my money back.

They wouldn't let me put my 15% into the bank, I was required to give it to them.  15% you question?  I'm self-employed.  Those of you who paid in the visible 7 to 7.5% over the years paid the same.  Your employers paid in a matching amount.  You do realize that your employers considered their match as part of  your overall salary cost along with workman's comp, unemployment comp, health insurance and vacation pay as well as any other benefits that were offered.
Jan 11, 2013 2:14AM

Anyone making over $100,000.00 annually from outside income sources should have their social security payments deferred until their outside income is below this threshold.  Social Security was meant to be a safety net.  You don't need a net if you have over $100,000.00 income annually.


My old boss got $29,000,000.00 for a company he sold and drew social security.  He says he drew all of his contributions out within two years and now was drawing on other peoples contributions.  I told him he should be ashamed of himself.


AND, I believe the time has come to repeal the XVI amendment which authorized Congress to tax income and put a stop to this liberal generated class warfare agenda.  Return some of the power back to the people by taking away Congress's ability to manipulate the people.

Jan 11, 2013 2:07AM
The problem with Social Security started back when rapidly rising food and fuel prices were excluded from the CPI, and the problem became ever-worse every time that the minimum wage slipped further behind our actual gross inflation rate.  The problem became seriously more-acute when rapidly-rising health-care costs and utility costs were also later excluded from the CPI.

Case in point, fuel prices.  Let's suppose that the CPI was only figured on fuel prices, as the cost of fuel is a portion of the cost of every raw material, every refined product, every manufactured product, and every consumer product. 

In 1973 the average retail cost of gasoline was 36 cents per gallon, the average retail cost of diesel fuel was only 30 cents per gallon, and the minimum wage was $1.60/hour.  Today the average cost of gasoline is $3.25 or 9 times what it was in 1973, with the average cost of diesel fuel running at least 10 times of what it was in 1973.

So is there any good reason that the minimum wage should not match the gasoline cost increase since 1973 at a minimum, from $1.60/hour then to $14.40/hour now?  Not only that. but since total withholding for Social Security and Medicare equal 7.65% of an employee's wages plus the employer's even-match, for a total of 15.3% of an employee's wage, imagine the effect on Social Security solvency as the minimum wage has fallen by roughly 45% indexed against gross fuel price inflation?

Fact:  15.3% of $7.65 is $1.17, while 15.3% of $14.40 is $2.20, so for every single hour that a worker is employed at our current minimum wage, the Social Security and Medicare trust funds lose 97 cents.  Furthermore, a far greater percentage of the workforce is employed at an hourly rate greater than the minimum and below $14.40/hour than are employed receiving the minimum wage too, resulting in an even-greater loss to Social Security and Medicare too.

We could easily fix Social Security by indexing the minimum wage to actual gross inflation rather than by further doctoring the way that inflation is figured, which only hurts those least able to afford it.

Jan 11, 2013 2:00AM

Take money from the billions in tax subsidies that Congress and the President signed off on in the Fiscal Cliff deal.  Billions for office buildings and apartments for Wall Street, billions for foreign affiliates tax incentives, billions to excuse tax on interest earned by American companies lending money abroad.


All of this done behind closed doors and secret- THOSE ARE THE REAL ENTITLEMENTS that both parties, their lobbyist friends and political/business cronies get with their campaign contributions.


But ehy want to take it out of the hids of ol;d people geeting 900-1200 a month in retirement.  Make syou want to regurgitate.  The corruption is so pervasive it is OBSCENE.  On top of this that have the nerve to approve a salary increase for Congress while 372,000 people apply for unemployment benefits EVERY WEEK!

Jan 11, 2013 1:34AM
What if we all pay in the same amount (7% of imcome or what ever it is)?  Just the professional baseball players alone would probably make up any shortage.  Whats wrong with us all paying the same?  Cant be more fair then that.
Jan 11, 2013 1:33AM
Hey, during the administration of G W Bush, the Democrats stated repeatedly there was nothing wrong with SSA funding.  So, Bush was 100% correct.  Funny how want to do something now.  Obummer…
Jan 11, 2013 1:29AM

The Government owes the Social Security program $2.7 trillion dollars as of 2011 this money was used by Congress for there pet projects there pay should be cut by 90% first off and any retirement should be null and void until this is paid back. Second ALL foreign aid should be STOPPED until this is paid back. And third NO pork no Money for any state other than disaster relief only until this money is paid back most people in this country are sick and tired of the pieces of SHI! in Washington and you can see a civil war coming soon the sooner the better.

Jan 11, 2013 1:17AM
Simplest way to save Social Security: require deductions off ALL income, not just the first $100K or whatever, and include investment income.
Jan 11, 2013 12:56AM
It's sad to see so many here fail to realize the government raped social security as if it was a cash cow when they ran it like a ponzi scam taking money from everyone and saying we don't have enough? Wake up! people....the senior who collects SS  who commented here needs to realized he is duped. Yes the system is messed up the government messed it up!
Jan 11, 2013 12:49AM
Jan 11, 2013 12:47AM
Eliminate the cap on earnings. Stop protecting the rich.
Jan 11, 2013 12:44AM
Jan 11, 2013 12:38AM

The author is just another don-nothing talking head who sat back in a cushy senior level government job and did nothing while, in her own words, the problems got worse on her watch. For that reason alone, she shouldn't have any credibility and should be ashamed to still be pontificating on this subject. If she's so smart and her ideas are so great, why did the problem get worse, not better, while under her supervision?


There are other ways to fix the system besides the tunnel vision she uses to view the situation. First of all, Social Security taxes are only collected on earned income. That means there are no taxes on investment income such as interest or dividends. I propose removing the exemption for "non-earned" income and tax all income for any source for Social Security. Why exempt so-called "passive" income from Social Security taxes? Such a change typically won't affect the "poor" however you define that term since they don't have excess income to be able to invest; that's part of their problem. Next, how about if we simply remove the ceiling on how much income is taxed for Social Security? The current ceiling in 2012 was $110,100 and in 2013 will be $113,700. Anyone whose earned income was less than that paid Social Security taxes on 100% of their earned income. However, people making more than that didn't get taxed for Social Security on their earned income above that amount. Why not simply remove the ceiling and tax 100% of a person's income from all sources. The Social Security tax revenues from someone making $250,000 would more than double immediately (maybe more) just from those two actions. Someone who makes over $1 million a year from all sources would wind up contributing 10 times what the maximum is they currently contribute to the program, maybe more depending on how their current income is split between earned and non-earned income. Let's try that approach, let the statisticians tell us how much additional money that would bring in for Social Security and what that does for reducing the shortfall; it might eliminate it completely.

Jan 11, 2013 12:37AM

The president says if a petition is sent to the white house site with 25,000 names  attached the white house will consider the petition. WHy don't we petition to return some of the money to Social Security that has been "borrowed"? I think that we could get 25,000 signatures? Why not? They got more than that to make Christmas eve a federal holiday for Government workers


Jan 11, 2013 12:22AM
It is completely obivous that older people that have worked all their lives are going to have to pay for the bad decisions politicians have made in the past. They took money from So.Sec. for other things,we send out billions in foreign aid monthly and seniors along with people getting close to retirement are going to have to pay the price to balance the budget for their spending mistakes.
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