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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i din't know I was one of the "rich" people who's taxes were going up! What a bunch suckers we are!
Come on now Folks! You know that Social Sec. has not, will not, and is not a Fiscal problem related to our Dept. FIX what? It isn't broken and mess with it; it can break it with the EXCEPTION of Removing Waste and Fraud. STOP using Social Security as a Health Care Fund for people under 62. Build a NEW funding program for all other than Retirement Income and let us Seniors live in peace.
As for Medicare....Stop and remember we PAY our fare share. We pay over $3000 each year from our small retirement income for Medicare Insurance, not like its FREE? Then we pay for our 20% C0-pay, & all of the Over The Counter Drugs not covered by insrance. Cry...cry...leave us alone!
The COLA should NOT be messed with. It doesn't keep up with real inflation as it is. Their chained fix would make it even worse.
According to the AARP, increasing the tax by 1% and raising the retirement age to 70 would solve the issue for generations to come.
Removing the SS tax exemption on wages above a limit would go a long, long way to promoting continued solvency to the Social Security annuity program. And it would would be far less punitive to far fewer people than adopting a "chain-weighted" consumer price index for Social Security's cost-of-living adjustment.
Face it, that index is based on the notion that when the times get tough, folks don't really feel all the pinch because they buy down -- you know, hamburger replaces steak. So they don't really need to have all their buying power continued for them.
But with those qualifying for SS -- the older and the elderly -- the predponderance of expenses aren't so adjustable downward: They are hospital, and doctor, and clinic, and surgery, and they are not available mailorder or at Wal-Mart or at Crazy Danny's Discount Surgery.
In act a law that puts it off limits to the president and his minions and use it only for what it was designated for, the elderly Stop the stealing in Washington and stop the welfare abroad to all these foreign governments they have their own presidents and dictators so why are we supporting them? Let them figure it out! bring those trillions back home
OBAMA RAISED TAXES WITH NO CUTS ANYWHERE!!!
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