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.
This post comes from Alicia Munnell at partner site MarketWatch.
This 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.
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.
More on MarketWatch and MSN Money:
- Should Obamacare cover Nicorette?
- Stricter rules for adjustable-rate mortgages
- 7 top nations for dodging taxes a la Depardieu
- 6 changes to Social Security in 2013
- Did the government make a Social Security goof?
- Downside of a higher retirement age
Alicia, are you trying to BRAINWASH the 99% American People? Look at the facts below and see if there isn't a MUCH BETTER WAY.
First of all, LET'S FIX THE HORRENDOUS DISPARITY OF WEALTH in this wonderful country that ONCE BELONGED to the 99% American People!
There is ABSOLUTELY NO REASON why any one family should have MORE than, say $5,000,000.00 Just look at all the ZEROS! Does it take MORE THAN THIS TO HAVE A VERY COMFORTABLE LIFE? Is this NOT SHAMEFUL for a ONCE Democratic government?
As Mr. Romneysia claims, it's "FREE ENTERPRISE", but for who? Why does his family or Al Gore's family need $300,000,000.00 or any other family need so many millions to enjoy a wonderful & fruitful life?
What about Buffett and the many, many other Billionaires! LOOK AT THESE ZEROS for just one billion! $1,000,000,000,000.00! That's one helluva lot of ZEROS for just ONE FAMILY!
So, stop BULL$HITTING the 99% American People, THEY ARE MUCH MORE INTELLIGENT than you might imagine!
FIX THE DISPARITY OF OUR COUNTRY'S WEALTH and you have FIXED "OUR VERY OWN" SOCIAL SECURITY!
It's time for BIG CHANGE, and that time is NOW! Not later, but RIGHT NOW! We have the "FOX" watching OUR CHICKEN COUP, AND THAT MUST CHANGE! Our "bought & paid for" Judiciary Dep't. is NOT THE ANSWER to the 99% American People's woes!!
lets take from their retirement plan to fun SS. See how they like it.
First off, kudos to:
Little Rambo Bambi, US Disabled Vet, gus Hurst, Ollyjelly, maddog 740, brutisbear5, Trock59 and many of the other similar "best" voted posts. Even on this lib blog site you are voted best comments; Is there still hope for the voting public yet?
As for "common sense adjustments": the problem is that in Washington DC, common sense is not common.
Every fix on the table is cutting social security, NOT ONE DAMN MENTION OF FIXING RUNAWAY HEALTH CARE COSTS.
Well if he wants common sense in congress I hope he isn't holding his breath because that went out the door years ago. At any rate I agree witht the part about adjusting the age to fit more with the longer life people live now. Similar to what I've been saying and that makes the most sense as not only is the base shrinking but you have people pulling money out much longer than the SS system was originally designed for. The getting the gov to stop robbing SS and like us vet aid no more spend or lose budgets, let the extra rollover, that line of thinking is total garbage and both sides are equally guilty in letting that happen. I would also add doing whatever we can to educate people to save and plan sooner which will also mean doing what we can to get higher paying jobs back here and stop the outsourcing that we see going on so that way people can actually have something to save.
I think its time
Federal gov't is made up of flunky lawyers who for the most part couldn't hack the private sector.
Common-sense: out with the old in with the new maximum two terms. The Kennedy era politician must go before there is any common-sense. Want common-sense: don't elect lawyers.
Copyright © 2013 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
ABOUT SMART SPENDING
LATEST BLOG POSTS
An annual cap on flexible spending accounts is increasing medical costs.