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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 6:39PM
Jan 11, 2013 6:27PM
Jan 11, 2013 6:11PM
A great way for the government to help social security would be to reduce the amount of our foreign aid, especially to countries that do not support us.  For the amount that is reduced, use that money to put in social security and Medicare.  At least the government would be helping our seniors and there would not be any tax increases. 
Jan 11, 2013 6:00PM
their not going to do anything but talk about it ,because right now most of us older seniors are going to be murdered by the governments so called health plan,so if your approaching retirement make sure you can afford another insurance to protect your health, otherwise you have about 18 months to live under government medical or medicare
Jan 11, 2013 5:55PM

1.)  Why not a small federal estate tax to help support Social Security?


2.)  Some people pay Federal and State income tax on their annual Social Security, put this tax money into the Social Security Trust Fund.


3.)  Change the look-back for Medicaid from 5 years to 10 years.  This should help the Federal Government's debt.  Right now people can put money into trust funds to legally "hide" from the Government.  If the money's been hidden for 5 years, people can be put into nursing homes with payment coming from Medicaid.  The person's money goes to his/her heirs tax-free; the government pays the $50,000-$70,000/year cost of the nursing home.


Jan 11, 2013 5:48PM
Fix your pensions, first. They have no incentive because theirs is guaranteed. Get rid of gov't pensions, look at what happened in the private world - 401K's. Then you'll assume the same risk as the rest of us and maybe you'd get yours arses to fix social security, namely stop taking from it to finance the rest of the gov't.
Jan 11, 2013 5:44PM
Three easy steps would make Social Security solvent for decades to come. First the Federal Government needs to pay back the 2 plus trillion it saw fit to pilferage from the Social Security Fund Accounts (especially during the Reagan years). Second, remove the 110,000 cap on the max covered by the Payroll Tax. This is the only tax we cap on the federal level. And thirdly those who use Hedge Funds and stock options to receive their income thru Capital Gains (max tax 15%) and subsequently pay nothing into social security  should also start paying their share. We had a Republican presidential candidate who hasn't paid into Social Security  for years and because he rolled over 7% of his deductions from 2011 will in all likely hood not pay any Federal Taxes at all on 13 plus million dollars for 2012. Is something wrong with this picture.
Jan 11, 2013 5:37PM
If all the Reps and Congress people belonged to medicare, I don't think we would have to fix anything they would increase it as they have done to their own program.
Jan 11, 2013 5:36PM
To fix Social Security  raise the cap on income that is taxable.
Jan 11, 2013 5:32PM
She assumes the only options are to increase revenues or to reduce benefits. Another option is to shift from tax based funding to investment funding. Rather than contribute SS taxes, employees and employers should be allowed to opt payments into 401K type investments. New entries into the job market should be allowed this option and traditional SS thinking should be phased out. 
Jan 11, 2013 5:31PM
With 16.4T debt, you know Congress is going to steal it, like everything else.   Our millionaire Congress cannot agree on anything or even make a decision.  Oh well, never planned on getting a penny from SS anyway, which was always just a supplement to income from the start.   Forward to a quadrillion!
Jan 11, 2013 4:57PM
raise taxes on the rich and the intelligent, that way the democrats won't have to pay any more..
Jan 11, 2013 4:49PM
Today, is a payday, however, my paycheck is smaller by $35 thanks to the Obama Tax Increase!!
I didn't know I was rich, so I guess I'd need to see where do I fall in the tax schedule...

People wake up and smell the coffee! You voted for the JOB Killer....
Jan 11, 2013 4:48PM
We paid into this fund,we paid our taxes,the politicians lined their own pockets and their extended families. We're giving billions to countries that hate us,and we're borrowing more, adding to the deficet-and now you want more from us. Karma is a cruel beast
Jan 11, 2013 4:43PM

1) Raise the income limit on the payroll tax to $250,000

2) Get rid of freeloading illegal immigrants who are bleeding our economy dry

Jan 11, 2013 4:35PM
Look there are a few problems with SS...

First, our imbecile President gutted the tax for 2 years.  That is now fixed.

Next, SS taxes must increase every year to account for the COLA in benefits.

Next, SS taxes need to be indexed to longevity.   The retirement age should remain at 67.  We don't want 70 year old people working.  

This is what must be done.  People currently collect every dime contributed by them and their employer at age 72, 3 months, adjusted for inflation and interest.  This is according to the SSA.
The tax rate needs to be raised from 6.2% to 9.3% to be match the average life expectancy.

The alternative is simply to limit benefits to amounts contributed.  And then to stop once they are exhausted.

Jan 11, 2013 4:27PM

The best fix for social security is to get the filthy thieving government out of it!

Let people keep their own money in the first place to invest for retirement as they see fit!

I've got a better way to solve the social security funding problem - tax all employment earnings, just like we do medicare, and if that's not acceptable, just raise the amount subject to social security taxes from the $110,000 current amount to perhaps $250,000.  That way we won't have to cut benefits, which is what the republicans always want to do to working people.
Jan 11, 2013 4:18PM

our  congress never intends to fix social security...its their actions that have put it in peril in the first place..with all the tax cuts and changing of laws so they can take from it..they have been trying to figure out away to make it go insolvent for quite some time . they have litterally spent our nation into bankrupsy with all there  little  extra projects that they sneak on every single bill that is passed.. and they give our military all the money that they need plus more  ..its like  there is no accounting when it comes to the military..if every dollar was accounted for that our nation takes in and spent wisely.. our nation wouldnt be in the shape its in today... and  there would be plenty of money to go around  plus money to  start paying off the wouldnt have plane loads of cash being flown to iraq and afghanistan and then millions and millions end up missing and no one knows what happened to it all. and no one is held accountable and its just slid under the rug and kept quiet... and the only excuse you hear is...national security....well bullll....but i hope they do fix social security and  keep the tax reinstated...but i have my doubts,,..and thats my take on it...

Jan 11, 2013 3:52PM
Let the government replace the money they took out of s/s and there won't be a problem, so why do we need a fix it?
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