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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 10, 2013 7:57PM

Most of the problem lies in 2 areas:


1) the labor participation rate stands at one tenth of one percent above it's all time low set in August of this year. This means there are less workers contributing to Social Security to support our aging population. As an added problem many workers have settled for lower pay part time and service sector jobs.


2) the Social Security Trust Fund has had an egregious misappropriation of funds to support spending programs. One of the most egregious being committed by the Clinton administration to give the illusion of a budget surplus at the expense of future solvency of the trust fund based on unrealistic projections going forward. This was a very dangerous maneuver that has now been perpetuated in not only Social Security, but now the misappropriation of Medicare Funds to defray the costs associated with Obamacare to give the illusion of the program not costing tax payer a dime in additional taxes.


Political policy is killing Social Security and living in denial by changing the way we view the ailing trust fund is not going to make the problem disappear!! 

Jan 10, 2013 7:56PM
Hi, quit funding wars with Social Security, I have payed in for 40 years , it was not  set up for anything but subsiding Americans in there old age !
Jan 10, 2013 7:48PM

Increase the social security tax to employer's only by 1% and drop the cap on contributions by employees, and your issue will be solved for another 30 years.

Jan 10, 2013 7:41PM

You all are looking at this all wrong. Seniors who have payed into the system their whole life are planned when we get old enough to file for SSA, just put us down using the "managed" health care board.


This way the US can still pay all the illegal's, and folks who move here from other countries who have not paid in.....and not pay a dime to those who did.......



Jan 10, 2013 7:36PM
Take the cap off the maximum income for social security taxes and all is well!!!
Jan 10, 2013 7:33PM

First thing is no retirement income should be taxed.


Second Congress salary should be $80K - $100k a year with term limits.


Third15% flat tax on income and capital gains with no returns.


Fourth get rid of the "Spend it or lose it BUDGET" Congress inacted over five decades ago and rollover unspent funds from one year to another, this will save billions every year on spending.


Fifth downsize government instead of making it larger.


Sixth bring industry back into this country by taxing and tariffing any America companies that went overseas. 70% of manufacturing must be in this country to avoid taxing and tariffing on products being brought into this country.

Jan 10, 2013 7:32PM
Pure and simple, the government pays us back the money they robbed from Social Security!! Why do we have to pay again for the overspending of our government. I cant afford any more money coming from my paycheck. Enough is enough!!!!
Jan 10, 2013 7:26PM
CPI is premeditated murder for many seniors who can't afford food now. Does the author want to go to hell? Raise the retirement age for SS and Medicare; Increase the threshold for payroll tax; don't allow those above $400,000 annual income to receive benefits; recall those who want to cut benefits for those 55 and older. Most GOP members say they are Christian and, yet, continue to support the Bush need to help the rich at the expense of everyone else. They need to read Prov. 16:22.
Jan 10, 2013 7:20PM

First off I'm a senior just recently on Social Security and this program needs to be saved.  We can't continue to pay for everyone and everything.  If a person works the appropriate quarters and get SSA income, they can possibly survive to some extent.  Without it our children will have to care for the elderly and you and I know that won't happen.  The very reason this program was established was to prevent the elderly going hungry as they age and are unable to work.  I fully believe that the USA government wants this tax money to use as they wish. Thats why so many trillons of dollars have been taken out of SSA and not repaid. Believe me the taxes will continue to come out of everyone's paycheck, that won't cease.  Stop the following:

1) Cease $255.00 death benefit; 2) cease dependent spouse & children benefits, this is elderly benefits; 3) Stop having multiple spouse's drawing off 1 persons SSA income; If a man or woman wants SSA retirement income, get out & work and earn your quarters so you can receive money; 4) I wish this could continue but it needs to stop - Early benefits due to a disability; so many fraudulant persons are declared disabled when they truly can work. I worked at a Dept. of Social Service and its required that a person apply for disability if they want to apply for Medicaid.  I've seen so many fraudulant claims. I wish all the programs could continue but the program needs to continue and some of these extras have to go, to save the program as a whole.


How disappointing to read something by someone who probably knows better - only to see the usual shots.  Only part I wouldn't argue with is "Restoring" the FICA tax to its former 6%.  It's a super-smart move - how anyone could imagine that REDUCING payroll taxes 33% would help the SS Trust-Fund remain solvent into the future simply escapes me.


(And I would bet also the employer's matching contribution was likewise reduced... But this has apparently been quietly passed-over in most discussion... I would LOVE to be wrong about this - correct me!  But IF I am RIGHT, the employers quietly pocketed an extra 2 percent of their payroll as they did not pay that 2 percent matching for their employees.  It's always the unspoken parts that harbor the sneaky little deals and perks.).  


But again I still see no mention of the BIG problems...  1)  Congress has "borrowed" 1.6 Trillion or so dollars from that Trust-Fund.  And 2) Congress has simply added on various un-planned-for costs and programs to the SS Trust-Fund - without also adding on the needed taxes to pay those extra bills.


Rather than trying to suggest raising retirement age, as done in this article, or conniving to reduce benefits (yeah... I would love folks to be transparent about the "chained inflation index" - it's the model of saying "hey! Steak got too pricey for you - switch to chicken - even if you can't stand the stuff, and we'll use the price of chicken to determine what your real costs of living are". A model to figure out how to REDUCE future benefits relative to increasing costs - a REDUCTION.), how about instead having Congress repay its debt, and how about cutting those unfunded programs off SS and putting them back into the general tax fund, where they belong???


Wait! Hot dogs are still cheaper (nobody wants those, so the price stays lower) - the price of hotdogs will be the new inflation index."  Only folks who have lots of money and are free from ever suffering that would ever suggest that as any solution.  As it doesn't affect them, it's OK if poorer old folks are squeezed down to eating hotdogs - and you can bet that the dawg index would be set using the cheapest (read nastiest) brand...


The SS program was created to be self-funding using a DEDICATED TAX on workers and employers.  That tax - the FICA payroll tax - was created to specifically pay SS benefits via the Trust-Fund.  Only Congress has, over the years, added on other programs and costs - disability insurance, for example, to spend that tax - without adding on any new tax income to pay that bill.  The FICA was never designed to pay these other bills.  It's like as if you paid property tax with the understanding that it pays ONLY for the town schools - and then the politicians plug in a road-building program onto that tax-stream. What happens to the school funds?


AFTER you have put the "borrowed money" back - with interest - and cut off the added programs and costs, then, and only then, is the time to both analyze the real costs versus income of SS and its Trust-Fund, and evaluate for possible changes in retirement age or COLA or benefits-levels.


Oh, and why not tax ALL income earned by anybody?  Why should the RICH not pay into SS?   We all live here. IF the rich want to collect SS, why, YES! Let them have it, too.  Keep the max benefit and "other income" rules in place and give it on!

Jan 10, 2013 6:58PM

Like the deficit neither Bush or republicans were concerned with social security shortfalls or our debt until a democrat was elected. Now it's life or death. Bush was the one that wanted to privatize it that would have left 10's of millions of seniors destitute when the stock market collapsed. Liberals prevented that.

Jan 10, 2013 6:51PM

The government literally stole over 2 TRILLION dollars

from Soc Sec...Many of us would like a chart of

amount of those dollars borrrowed (date and time)

then the amounts the gov has repaid the Soc Sec Fund...(date and time)


The gov would rather pay out phenomenal billions in

Foreign Aid than repay the Soc Security Fund!!!

Jan 10, 2013 6:49PM
So.Sec doesn't need to be fixed, if the politicians had not made it a general fund and robbed it everything would be fine. Fix the politicians. People are dieing like flies in nurseing homes daily and therefore being removed from So.Sec along with thousands that get killed in wrecks yearly that have paid in but never get to draw. Theres nothing wrong with So.Sec other than we are being lied to.
Jan 10, 2013 6:40PM
Have the Government pay back what they took and I bet it could run for years and kick all the illegal's and moochers and do something about fraud and it would be a ongoing deal !
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