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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.


More on MarketWatch and MSN Money:


Jan 11, 2013 10:58AM
The Government literally collects twice what you pay, your employer pays the same amount that you do , so it has a lot of funds to play with in establishing a floor amount of all retirement income. Statistically the average amount paid by most workers is around sixty thousand dollars over his employable life. If the Fund paid ten percent of all you paid in as a death benefit and divided the balance by a formula based on current actuarial tables. A person who retired at age 62 could expect to receive 54 thousand dollars divided by 456 or $118.00 per month guaranteed for fifteen years certain or until death. This means that if he lived to be a hundred he would receive all that he paid in. If he died prior to his 77 birth date, his heirs would receive how ever many months left times $118.00 plus the $6,000.00 death benefit. A floor amount could be two and a half times the poverty level of private pension income from all sources. The $118.00 monthly payment would not be subject to COLA increases nor be taxable. If for some reason his pensionable income became lower that the established poverty level, he could reapply to SS to have his SS income increased correspondingly.            
Jan 11, 2013 10:57AM
I read these post and most are good and correct. However since the problem is in DC why in the world do we keep re electing these idiots year after year? We complain about term limits when we have the power to vote them out of office. We can set term limits.The problem is i am afraid is the 51% of Americans who draw money from these account that don't want change. And by accounts i mean all the free government handout monies to the lazy asses who won't work.
Jan 11, 2013 10:57AM
Hahaha. The government should repay what it took out. Seriously, I almost blew my coffee all over my computer screen from laughing. And where do you suppose the government will get that money to make the payment? Are they just going to print up some dollars? Are they going to call outstanding loans to other countries? Are they going to ask the Tooth Fairy? Please. If that money gets repaid at all, it will be from the sweat of working Americans and an increase in taxes! What we need are policies that cordon off SS to keep our politicians from pilfering it. After all, it's not their money! And I really hate it when people call it a benefit. From where I stand, it's an entitlement! I paid in, and that is my consideration for future income. Entitlement!
Jan 11, 2013 10:54AM

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!



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!! 

Jan 11, 2013 10:51AM

lets take from their retirement plan to fun SS.  See how they like it.


Jan 11, 2013 10:51AM

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. 

Jan 11, 2013 10:51AM
Why is there NEVER any discussion of fixing  "health care costs are soaring".

Every fix on the table is cutting social security,  NOT ONE DAMN MENTION OF FIXING RUNAWAY HEALTH CARE COSTS.

Jan 11, 2013 10:49AM

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

Jan 11, 2013 10:48AM
Everyone wants the cap to disappear on the tax, meaning tax them on all their income.  Remember it's a two way tax, are we going to pass this unlimited 6.2% tax onto the employer also??
Jan 11, 2013 10:45AM
Just another example of liberalism running unabated.  Country needs a turn to the right, and fast.
Jan 11, 2013 10:42AM
The idiots in Washington will keep "stealing" money from us how ever they can get it!!!

Jan 11, 2013 10:36AM
Originally Social Security was designed as a safety net for people who reached retirement age and their employers had no pension plan. If we went back to that concept, setting a minimum amount of private retirement income as a floor. and eliminatinf SS payments above that amount, but with a guaranteed return of the funds paid into FICA over a stipulated period of time based on age of retirement, it would make SS solvent for the foreseeable future. As it is presently configured some people receive more in retirement income with their pensions and SS than they did while working. A person with a eighty thousand dollar private pension should not be receiving maximum benefits added to that pension. If the funds he paid in were to be returned to him via some fair formula, I do not think most people would object to such a program. He would still be receiving some payment from the fund but not the maximum benefit. Social Security is for all intents and purposes an insurance policy based on you reaching retirement age and having some retirement income. Like all insurances based on life expectancy you win some and some lose. By this I mean some people die before they have collected all that they paid in and others end up collecting far more than they ever paid. Because it is compulsory, if you reach retirement age and you are receiving a minimum standard of retirement income, a return of most of the funds you paid in would not be viewed as being ripped off by the system and many would forego receiving a maximum benefit in lieu of this.         
Jan 11, 2013 10:31AM

Common-sense! LOL

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.

Jan 11, 2013 10:30AM
How's this for "common sense"?  To think that a kid born now will most probably live to 95 or more why should they be able to retire before age 70?  With medicine and science comes increased life expectancy, and with that should come common sense, and that is it is absurd not to slowly move retirement age back to reflect the coming reality of increased longevity.  And it's also absurd that billionaires need any supplemental income, Oprah and Bill Gates do not need a SS check. 
Jan 11, 2013 10:29AM
take it away from the government.  let the people deside what they want their SS to go to.  let people choose to handle their money in a private fund or the normal ss or a split of both. if people want to handle it in a private fund  then they should be able to call off all the monies they put in at one time and transfer to a fund of their choice. after all it is their money not the governments money.   make the government live within their means  and stop controlling the peoples money
Jan 11, 2013 10:27AM
I would LOVE to know how many billions of dollars are wasted every year giving money to dependents and college students who never put a single penny into the system!!! Eliminate that waste of time and then come talk to me about whether you want me to contribute more money and work until I'm 108 before you let me start collecting any of MY contributions....
Jan 11, 2013 10:23AM
First , How do we get the gov't to pay the stolen money back ? How do we get the gov't to enact a 20% cut in congressional pay and benefits and staff ? The, may be we can look at other "wasteful spending " !
Jan 11, 2013 10:22AM
According to the SS benefit statement received every year, SS will be underfunded by 2031?  So, how can I stop contributing now?  I'll give the last 29 years worth of contributions to society and not expect anything when I die.   Fact is folks, retirement is a choice not a right.  And yes, it sucks.  Better take care of yourself, health wise and financial planning.
Jan 11, 2013 10:22AM

First of all there should be no limit on the Social Security tax. Second under the Clinton Adm. when everyone was working after 65 you could work and draw this should stop or lower. Third using Social Security funds for anything other than what it was intended for should stop.


Johnson put Social Security in the General Fund and the Congress has been rapping it ever since. Yes I know they pull out the surplus and issue a Bond the only problem is we are almost broke and the Bond will be worthless. This money should not be part of the General Fund it is not the Governments money to play with.


The last thing give our Congress a modest retirement and put them on Social Security they will fix it in no time.

Jan 11, 2013 10:21AM
Government officials do not pay into S.S. But, they collect a good size pension once they retire. I always wondered where the monies come from that pays these people for life their pension and medical expenses??? I assume from our taxes but are they also hitting up our S.S. fund for their high retirement cost??? Does anyone really know???
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