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.
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the only fix is quickly becoming more evident every day! Why do you really think these "professional" politians are getting on the band wagon for gun control? Armed revolution by the masses is all that will save us now!!!!!!!!!!
SS is to help people that NEED help. It isn't supposed to be a 2nd career.
Washington could stop using S.S. as their never ending piggy bank.
Stop all foreign aid to terrorist country's and pay back all the Gov stole from SS fund since Pres L..B. J.
That should go a long way in fixing it.
Presuming that the country will survive this administration intact; and we really want to "FIX" social security...
First, include in the code provisions that will keep their greasy fingers from stealing any more.
Second, return it to being a "retirement program". There was never enough collected to make both promised retirement payments to workers AND "disability" payments to people who never paid a dime into the system.
That done, why not just eliminate the income ceiling ($113,700 in 2013) for SS tax purposes and stick the funds in a true trust account.
That would dramatically increase revenues and at zero impact on lower income earners.
Reducing benefit amounts or increasing the retirement age, on the other hand, have a much more dramatic effect on, and are not fair to, lower income workers who have paid into the system for a lifetime with an expectation of a promise to be met.
Furthermore, most of those who will pay the tax all year are far less likely to be adversely impacted by it.
And finally; it satisfies the liberal blood-lust for "sticking it to the rich" (or at least, those who are seen as better off than others, regardless of how they got there).
The biggest trick to this (or any) suggestion for fixing SS is finding a way keep the people with a demonstrated inability to manage money (i.e., the government) away from the program.
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