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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 11:51AM
YOU PLAY WITH SS and you will pay in 2012

as Health Insurance is now a tax -- supreme court ruling.


is it legal to tax a tax???



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.

End Quote

Jan 11, 2013 11:49AM
obama has ****ed this country up , this guy is an idiot the worst president ever, all you old fuurks an people drawing disability and social security this is the guy who will furk you out of your money your an idiot if you voted for obama hes out for his own good and gona furk america up on his way you r gona see less and less money  socialism111

For all of you that said S.S. would be okay if Congress had not stolen all the money from it need to read the Trustee's report. The government started paying back the money it borrowed from S.S. last year borrowing $45 billion to pay back the money. They will continue to do this until all of the $2.6 trillion borrowed from the fund is repaid around 2030. After that date S.S. will only have enough income after that point to pay beneficiaries 75% of promised benefits. That is what happens when you set up a program to pay people not on what they have invested but having current retirees receive their money from current payers into the system.


I saw a report a few days ago that the average person will have paid about $300,000 into S.S. over their lifetime and receive about $400,000 in return. That sounds good but is really a very poor rate of return on your "investment." If you had taken those same funds and invested them yourself into a fund and received just 4% per year you could retire on 3 times the amount S.S. pays. Also, when you die the remaining funds can be left to your heirs where with S.S. you get a death benefit of $225. 

Jan 11, 2013 11:43AM
I agree the government took the money which is legalized stealing now we that need this right to survive have to suffer for it.
Jan 11, 2013 11:42AM
the government did not STEAL anything. If you look really carefully at the law it has been and always WILL BE their money. It was always intended to be a hidden tax and entitlement system. THE PERFECT PONZI SCHEME.

The WHOLE FINANCIAL SYSTEM is designed to be noting but a ponzi scheme that will collapse and then they can reach their final goal.

Jan 11, 2013 11:35AM

Get real

Common sense - politicians. They go together like fire and water.

Jan 11, 2013 11:35AM
Social Security is run EXACTLY like a Ponzi Scheme.   Madoff is doing 126 years for this very same thing.
Jan 11, 2013 11:34AM
Use the Gold we have in reserve that is just sitting looking pretty to put into the social security system to keep it going for many more generations. After all the government did take money out of Social Security. They need to replace it. Why not gold its just sitting looking shinny and pretty!!

By stopping lying reports about Social Security would fix the problem.

Jan 11, 2013 11:29AM
what this man is talking about makes very little sense because the first thing people and govt has to do is make ss untouchable.  the bail out of the sand l banks for starters. b1 bomber  . in the ss fund there sits a iou.  everybody knows this. it was around 1980. now if u figure about a 1.3 trillion iouat about 7 percent payback then it would cost the govt too much money when u figure 30 yrs at 7 percent so they decided not to pay anything back.  just check money facts.  if it would not have been touched therer would be plenty of money in the fund for ss and disability                                                                                                            
Jan 11, 2013 11:29AM

You voted for Obama, and you got a tax increase.  Apparently, that is what you wanted, so, you are going to get alot more of what you wanted in the short-term future.  The payroll tax increase is just the beginning!

Jan 11, 2013 11:23AM
I agree with the majority of comments here but the ones I like the most are the least often thought of and never brought up by politicians. Why is there a cap on how much you make compared to how much you pay in to SS. If you're well into that 6 figure bracket you can obviously afford to keep paying the tax levied other earners.???
Jan 11, 2013 11:12AM
Well, if they decrease the social security & medicare payments enough so less & less care is available to the old folks, it will decrease the old folks population a lot and solve the problem in about 2 generations......
Jan 11, 2013 11:09AM
Let's see now if I got this right.  You pay into SS all your working life.  If you are unmarried and have no young children,  and die just before retirement, everything you paid in DOES NOT go into your estate???  Maybe the USA should try to catch up with, oh I don;t know, let's say the country of Chilie, which has private retirement accounts that workers pay into and it all belongs to the citizen and his estate keeps the money he earned when he dies.
Jan 11, 2013 11:08AM
I know, tell congress that they will have to retire on social security and medicare and watch how fast it gets fixed!
Jan 11, 2013 11:08AM
No comments about means testing. I feel like SS should be looked at like POVERTY Insurance. There if your personal savings, 401k's, IRA's or other pensions do not give a retireee a certain level of income. If they don't then SS kicks in. With such a system the amount needed to fund SS in the future could actually decrease.
Jan 11, 2013 11:05AM
Here's another option to consider.  Instead of raising taxes to pay for the Social Security shortfall, we could instead lethally inject people when they begin to collect more than they paid in to the system.  To delay your lethal injection, you can have the option to voluntarily contribute more money into the system.  You would also be able to pay on behalf of other people (friends, family, etc.) to extend their life too.  I bet this would correct the problem rather quickly.
Jan 11, 2013 11:02AM
Radical change (and political TNT) is required to TRULY address the SSA situation - the SSA programs were instituted as a final "safety net" when all else was not available - IT WAS NEVER, AND NEVER SHOULD HAVE BEEN CONSIDERED, A GOVERNMENT MANDATED ENFORCED SAVINGS PLAN - SSA benefits should only be payable to those who financially require them . . . people of means should not be receiving SSA benefits . . . I know, I know . . . "I paid into the system and I should get my $$$ back" . . . everyone pays insurance premiums, without the expectation of "getting their $$$ back" . . . SSA benefits should be viewed and administered as financial insurance benefits and SSA taxes should be viewed as insurance benefit premiums, not bank savings account deposits
Jan 11, 2013 10:59AM
All the people writing about how the government needs to just pay back the IOUs to the trust fund are swinging at windmills.  Spoiler alert.  We are the government.  We elected people who did this, and we approved of it (apparently) because we kept reelecting them.  Now the damage is done.  The only way to pay it back is to tax us more now and in the future.  Where else will the funds come from?  Welcome to liberalism run amok.  This is what happens.  Social Security is nothing more than a government sponsored ponzi scheme.  It requires future participants to pay for current recipients.  When the math goes sour, as it always does, you either have to find more participants or ask for more money per current participant.
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