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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 3:47PM
There should be no limit on earnings for social security taxes. 
Jan 11, 2013 3:47PM
Thank God the Baby Boomers are all eating themselves to death! Can you imagine how expensive all of this would be if their average lifetimes were stretched out another 10 years?!!
Jan 11, 2013 3:43PM

I'm sure thius is not what SS should be funding. Abortion and women's health has nothing to do with retirement.

Previously, such establishments in Texas obtained 90% of their money through the Social Security Administration and other federal funding.

Jan 11, 2013 3:39PM
Instead of punishing middle and low income workers by taxing their healthcare costs, how about increasing revenue for Social Security by applying the tax all the way to the top of a taxpayers income. At this time people who earn more than 100k/year pay no tax on that income.  What is worse is that rich people don't work at all so they pay no Social Security tax at all. The wealthy make their income off Capital Gains which are taxed at 15% at this time. Why not add Social Security tax to the sale of investments owned by the truly Rich. Then Wall St. would finally be contributing to our economy instead of pillaging it.
Jan 11, 2013 3:39PM
Sorry, lets phase it out, not raise the taxes and set it up so that the people making the money now have it when they want to retire.  If someone started a full-time minimum wage job straight out of highschool, raised there income by a mere 2% each year, had the 12.4% that is currently used to fund Social Security in an account of their own, and averaged just a 3% annual gain on those funds alone, at age 65 they would have nearly $290,000 for retirement.  Thats just on the money that is currently being sent off too Washington to waist.  They would have that on top of whatever other 401k or savings plan they had for retirement.  I mean seriously, you actually think we should take MORE money out of hard working Americans paychecks for Washington to waste?  How does that help the economy?

Labels actually greatly affect how discussions go and what conclusions, if any, you might reach from them.  Labels come with implied values and hidden baggage.  So, maybe we should look at some labels used in the Social Security discussion - maybe this could help us get to the problems which need fixing!


Is the Social Security retirement benefits program "an entitlement", "insurance", or a "bought retirement annuity"? 


We use "Entitlement" to label things "you are entitled to get because you exist or breathe".  A GIFT or GRANT from others to YOU.  SS is NOT a NOT a gift nor a grant handed out by the wealthy to the poor, by government to "the needy", or anything like. Calling SS an entiltement program is loading this discussion with baggage related to growing popular resentment of "hand-out" programs and "welfare".  SS is NOT any of these.


"Insurance"... where I pay someone else to accept liability IN CASE SOMETHING HAPPENS TO ME!  I buy home-owner's INSURANCE to have a company PAY for my house after it burns down.  IF it does not burn down, I don't get anything from that company for the money I pay in for my policy.  Same for healthcare, auto insurance, employment (or unemployment) insurance, etc.  Alas, SS is named "Insurance".  Do you think of getting old and retiring as a chance mishap which may - or not - happen? Are we paying in as if we are buying some "insurance" against the "possibility" that we get too old to work?  I doubt that's how we think about it. But folks do try to play on this - by, for example, trying to push retirement ages out so that fewer get there.  That's the "insurance" aspect of SS - folks trying to collect from many and figure out how few should actually collect.  Yes, that is how we "do" insurance-pools. NO, not the way to discuss SS - we should NOT be trying to figure out how "the company" can keep more of "your premiums" as profit.


SS is actually much closer to - maybe should be called - a Paid-for Retirement Annuity Program.   Folks pay in on the promise it WILL be there when they get old.  Probably almost nobody plans to work, contribute to SS, and then, come age 61 and 1/2 or so, purposely DIE so that they won't get SS benefits.  Therefore, "all participants = paying contributors" EXPECT to live long enough and get something back.  THAT, friends, makes this NOT an "insurance "if you accidently make it" probability-scheme", but actually a functional Annuity "I pay in and expect a pay-out later on" scheme. 


Maybe if we talk about it from that perspective, it should become clear that you CANNOT fairly push the retirement age out "after the fact" on people - that is simply treating this as a game - "Hey! You bought in under these rules, but now we are going to change the rules after you have played fair!", and likewise conniving to reduce benefits-growth by creating new ways to calculate "inflation" (a device to reduce what folks get with a cloak of apparent "reason" which has nothing to do with actually figuring out what inflation is or how it works, or whom it affects more or less?) is reprehensible.


How about taking the added-on programs and costs off the back of SS funding, and how about returning the "borrowed" money?  See?  I didn't say STOLEN!  I'll insist they were Borrowed.  If Congress had borrowed them with the intent to NOT pay them back, then they intended to commit FRAUD, and ALL subsequent members of Congress have knowlingly AIDED and ABETTED this crime by not fixing what they have been wholly-aware happened.  Maybe they should ALL go to prison and lose their pensions, etc. etc. - If this is what actually happened.

Jan 11, 2013 3:36PM

Social Security could also cut or eliminate payments to those people who receive full pensions from state and local public retirement systems.  Many people, who retire early to collect a public retirement pension, get a part-time job in order to also collect on Social Security.  I don’t know of anyone who retired early on Social Security and then said “I think I’ll get a county job so I can also get another pension” – it doesn’t happen. 

In Ohio, the state, county and city employees can retire with full benefits from the public retirement system, then get another public employee job and pay no retirement, neither public retirement tax nor Social Security tax.  Talk about greed - full pension plus a tax free salary.

Jan 11, 2013 3:33PM

tax the rich

feed the poor

till there are no

rich no more.

than go after the middle class.

Jan 11, 2013 3:25PM
I thought Obama just fixed Social Security with the latest "fiscal cliff" agreement.  Have you looked at your paycheck yet" we are all paying an extra 2% for Social Security.  

Too bad that all the idiots that voted for him actually believed he wouldn't raise their taxes.  And this is only the tip of the iceberg.

Jan 11, 2013 3:24PM
Jan 11, 2013 3:12PM
Social Security was never in trouble until that wonderfule Democrat Johnson put it all in the general fund, I bet they could not give you a balance sheet and proft and loss statement showing what has happened to all that money.  I could balance the budget, 1st cut all their salaries out, they are rich anyone and have gotten that way by under the table lobbiest payments, Cut their perks no insurance no retirement and no security.  Let them go on OBAMACARE its so great, put them on their on 401K retirement not lifetime salary and if they want or need security let them pay for it themselves.  They have done nothing but rape the middle and low working class to pay for all their perks which we do not have.  They raped SS until they have broken it and they will not admit that the pork they add to all the bills is what is ruining our country.  The only thing we need is a strong Military, stronger watch dogs for overseeing what the government is doing.  This would go a long way toward cutting the debt.  Oh, also they can travel commercial, not flying ont he tAXPAYER dole.  You know they talk about entitlements, well they are the ones living on entitlements paid for by the working taxpayer.  They need to cut welfare down to only one child, if you have two you better be able to support it.  There was a woman on TV this week with 15 kids by 8 different men and she said the government needs to support these kids, the government supports no one, the TAXPAYERS do and we are tired of it.  I want to see a streamlined government, working for the taxpayer, cutting their benefits package, term limits to two and thats it go get a real job, this is the way the government was suppose to work. 
Jan 11, 2013 3:08PM

To all who said it doesn't need fixing it needs to be kept from the hands of the Government,  a big Amen!  Raising the age of retirement to 85 is no answer, cutting back the healthcare benefits is not the answer!  The answer is plain in simple, "Mr. President pay back all that has been taken from the SSA"

It was set up to be separate from the General Fund but because of the Greed it has been put into it.

Simple solution pay it back don't cut it back.   Stop throwing money at countries who hate us, stop forgiving the loans given to countries.   Instead of giving raises to congress, how about taking a cut until the budget is under control.  Make All Government Officials take Social Security, No more Salary for life!

The Government Works for us not the other way around!   I say like ol Grandad used to say "Time for a good old fashion neck tie party, get rid of all the corrupt politicians and start all over".

Jan 11, 2013 3:08PM
The politicians force us to contribute to SS, and they also force us to fund their lucrative private (non-SS) retirement plans.  They serve 4 years, and they retire on $170,000 plus per year.  You work for 30 years, and you're lucky to draw  $15,000 per year.  Anything wrong with that?
Jan 11, 2013 3:03PM
I agree that politicians should not receive the outrageous benefits they vote for themselves, they should be stripped of these lifelong perks.
Next, putting the money we send to ssi from our paychecks into whole life insurance would pay almost as much as ss, and it is tax free income. If the family rolls that money over when I die, they would have tax free income as well. This could go on and on, and stop the need for having to rely on the crooked congress to fix anything with ss.
Term limits and limited benefits for congress, lets make it happen voters.

Jan 11, 2013 3:03PM
You need a limit on taking funds out. Jack Welch should not be getting SS pmts after what he and his employers paid in.
Jan 11, 2013 3:02PM
I hope that I am still around to see the first wave of SS retirees who see a default on their benefits.  It will be entertaining to see the politicians being dragged out of the capital building and punished in the streets. 
Jan 11, 2013 3:00PM
A few thoughts:
1.  You say "no one wants benefit cuts," but have you asked those under 40?  I would gladly accept benefit cuts to relieve the unbearable burden entitlements are placing on our federal budget.

2.  You say "53% of households are at risk" of not being able to maintain their pre-retirement living standards, and I say "Great!"  Too many Americans have lived beyond their means for years; we need to learn to spend less than we make (so does the government by the way).

3.  You say not very many people have anything else than their 401K, but many younger workers are not counting on SS as a significant portion of their retirement and are thus saving in other ways.  As long as people believe they can "depend" on SS, they will not save anything else; but if we know we can't survive on SS alone, then we will make other plans.

You have some good thoughts, but I don't think you are taking into account the perspective or outlook of workers in their 30s-40s.

Jan 11, 2013 2:59PM
So let me get this guys are upset with our government?  Well then, for Christ's sake, stop re-electing them.
Jan 11, 2013 2:58PM
Eliminate give away programs attached to SS. Use the fund for RETIREMENT Only and set up all associated Give Away programs under another Title Program. Cut abuse and fraud as it still exists.
Jan 11, 2013 2:50PM

Congress wants to increase the Social Security Trust Fund so there is more money for them to spend.  They all know how to spend money on wasteful projects in their home cities and states.  This is how they “buy” votes.  It’s ludicrous to cut the COLA and then add 5% when people are 85 years old.  Just don’t cut it at all; many say the current COLA is already too low.

Not every worker pays into Social Security.  Many state, county and city workers participate in public retirement systems.  These public retirement systems make more money on their investments.  Our Social Security money is spent on projects which benefit these workers, too.  In order to be fair, the government should borrow from or tax the public retirement systems. 

I would like to see the Social Security Trust Fund eliminate loaning money to the government.  Call in all the loans to the government.  Invest Social Security to make more money, as the public retirement systems do.   This would probably solve all the problems with underfunding.  Creating more jobs would also benefit future funding.

Social Security could also cut or eliminate payments to those people who receive full pensions from public retirement systems.  Many people, who retire early to collect a public retirement pension, get a part-time job in order to also collect on Social Security.  I don’t know of anyone who retired early on Social Security and then said “I think I’ll get a county job so I can also get another pension” – it doesn’t happen.

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