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
The money you and your employer paid in only last 5 years. Everybody knows someone who took that 401K or IRA money out before its time and now have little or nothing extra to retire on. Repubs want to privatize So Sec but, most Americans can't balance their check books. Investing for the future, good luck. You can see where i am going? Learn how to invest for the future. Save your money. You will have a better chance of saving for retirement than winning the Powerball
I agree social security is fine Its the republicans that want to get rid of it, They are the problem . They have been trying to get rid of social security for years. They need to pay back what they owe, And quit giving that money to everybody else. Why is it that we can all see what they have done to social security , But they don`t seem to have a clue. Can they be that nieve or is this their level of knowledge not to understand what the problem really is. Good leaders can look at problems and they know how to address them and fix them. All the republicans know how to do is just cut everything because they don`t have the expertise to figure it out. Takes good leaders to do a job right. Any body can cut spending, But it takes good leaders to figure out what is the right path to take.
Many Elderly People that I know and have met try to survive on $577. or $670. a month from Social Security - they don't have any other income and a lousy 1 1/2% or even 5% cost of living increase does not even start to cover the actual cost of living increases.
These people have worked all their lives to support themselves, SS and the US Gov....but now that they aren't slave labor to pay taxes to a BS Gov that don't give a damn about them - the Gov throws them Under The Bus.
Come on.......get real.......the very minimum paid to anyone on SS that does not have any other income should be $2000 a month - not $500
They still have to live under the bridge - or under the Bus that they got threw under
1) Admit that it's a TAX not a savings account.
2) Tax ALL income for Social Security and Medicare.
3) Make benefits needs-based. (My boss retired in 2002, had a 401K worth over $2 million and owned 4 houses outright - he shouldn't get government benefits.)
I think there is a easy way to shore up SSI.
Stop the current retirement plan of congress. Serve 2 yrs and recieve full salary for life. WHAT!!!!
Take all the money in this so called plan and move it to SSI.
Then cut congress' wages to say $60,000 per year vs the current $177,000 and let them contribute to SSI and a 401K like the rest of us.
Why should the people who are forced into this 'Ponzi' scheme be asked to retire later or accept less? The government employees retire earlier (on average 12-15 years earlier), plus they retire at 90-100% of their final year's salary as compared to the meager pittance the rest of the private sector is told to live off, yet we do nothing to curb this ridiculous retirement package for them. The people exist to simply supply the government workers with a golden parachute.
Copyright © 2013 Microsoft. All rights reserved.
ABOUT SMART SPENDING
Editor Bev O'Shea lives and works in the foothills of the Appalachians. A former copy editor for The Atlanta Journal-Constitution and the Orlando Sentinel, she joined MSN Money in 2007. She's a fan of sunsets, college football and free shipping, among other things.
Having worked as a writer, reporter and editor for more than 25 years, Editor Julie Tilsner is the sort of person who can't help but correct grammar in Facebook postings and on billboards. She's written for BusinessWeek, the Los Angeles Times, Parenting, Redbook, AOL and others. She lives in Los Angeles County with her family and loves to drink wine and practice yoga, although not generally at the same time.
A writer for MSN Money since January 2007, Donna Freedman won regional and national prizes during an 18-year newspaper career and earned a college degree in midlife without taking out student loans. She also writes about smart money tactics for magazines and on her own site, Surviving and Thriving.
Mitch Lipka has been warning people about scams and shining light on questionable business practices for more than 20 years. Mitch, the consumer columnist for The Boston Globe, has also been a reporter and editor at The Philadelphia Inquirer, Consumer Reports, South Florida Sun-Sentinel and AOL. He won the 2010 New York Press Club award for best consumer reporting online and was honored in 2011 for his reporting on child product safety.
Marilyn Lewis is an award-winning writer with a passion for getting readers clear, straight information that helps them stay out of financial trouble. A former reporter for The San Jose Mercury News, she works from her home in Port Townsend, Wash. Contact her at MarilynLewis@Outlook.com.