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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.


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Jan 10, 2013 9:47PM
I feel there are a lot of people being discriminated against if they raise SS / Medicare, her is why, Federal, state, local government workers, teachers etc can collect TAX money when they retire and also heath care at 50 to 55 years of age. They are sitting on the easy life and are collecting right away, it looks like the rest of us will not be able to collect anything if they raise the age again on SS or Medicare we will just die off before we can afford to retire. They should raise the age on these early Federal / State Local etc. retires, not the working class people, maybe some would hold off a little and save some of the tax money for the rest of us workers that do not have a large pension. I feel like a modern day slave.
Jan 10, 2013 9:44PM

the only fix is quickly becoming more evident every day!  Why do you really think these "professional" politians are getting on the band wagon for gun control?  Armed revolution by the masses is all that will save us now!!!!!!!!!!

Jan 10, 2013 9:38PM
The most logical is to tie it to life expectancy. SS was supposed to be used to fund the final years when you were unable to work. With people living longer and healthier, there is no reason for SS. If you want a long retirement, knock yourself out but do it on your savings not my tax dollars.

SS is to help people that NEED help. It isn't supposed to be a 2nd career.
Jan 10, 2013 9:37PM

Washington could stop using S.S. as their never ending piggy bank.

Jan 10, 2013 9:36PM
The government uses our social security money to fund themselves. Had we been able to put all of our social security money into a mutual fund or 401k plan we would be millionaires by the time we retired, that is if we all worked full time and say from 20 to 65 in years of age. The social security we now receive is OUR MONEY not the governments. We paid into it and we should not be ashamed to have our benefits. In my opinion we should continue with the c.o.l.a. and start taxing social security for every penny people make. That alone would give SS more than enough money to pay. At present I believe SS is only paid up to the first $110,000 then no more deductions. If people paid to their full income say a million dollars for instance they would pay 10 times more than they do making $100,000. This would tax the rich way more than the recent tax hikes and the government will always use our social security anyway. But this would give them so much money that the government would be over funded and could pay off the national debt. The other GOOD way to fund social security is cut benefits for people who make lots of money after they retire with pensions, 401k and such. Look at it this way if you're already a millionaire why do you need to collect social security or medicare? Many do. Actually I think someone getting a $50k pension doesn't need social security either, maybe medicare but not SS. It's time to means test SS and lower the age back to where it was 65 for full retirement and 59.5 for early retirement. 
Jan 10, 2013 9:32PM
I believe the amount  bush took was closer to 4.6 trillion
Jan 10, 2013 9:32PM
Try having congress paying the money back it stole from it all these years and stopped the right to make high risk investments with the money.Would be a great start
Jan 10, 2013 9:32PM

Stop all foreign aid to terrorist country's and pay back all the Gov stole from SS  fund since Pres L..B. J.

That should go a long way in fixing it.

Jan 10, 2013 9:31PM
The proper way to look at Social Security is save it. Ronald Reagan and Tip Oneal made it secure for decades. The SS fund does have 2 trillion plus in Government IOU's, but this will only cover 25 to 35 years of 100% payouts. Since people are living longer, something has to be done. The life expectancy in 1935 was many years less than today. I believe that if you make future recipients wait a few more years that would extend the fund to at least 50 years from now. The future in 50 years will change in ways that we never could imagine.
Jan 10, 2013 9:31PM
Let's face it, as long as we keep putting people in Washington like we have now things are not going to get better.Their all Me people and could care less about WE THE PEOPLE. We need to get very serious about TERM LIMITS.
Jan 10, 2013 9:31PM
how about stop referring to it as an entitlement's my money that I put aside and my employer's is not the government's money...they ripped the fund off years ago and have not paid it back setting up the present and future shortfalls...stop paying rich people who do not need the money...
Jan 10, 2013 9:28PM
After working 5 days a week for 40yrs i find out i am entitled to 1200.00 a month of social security. WOW! looks like dog food for dinner, in my nice warm cardboard box under a bridge!
Jan 10, 2013 9:28PM
Social Security was for the people, not for the politicians to take from and fund other things.  We pay into it, and should get it back for retirement.
Jan 10, 2013 9:26PM
Most folks don't remember, but in the early 80's the government allowed businesses to pull out of SS for a short period of time. So many did that they simply stopped the program and required all to stay in the program. The one congressman that I saw interviewed didn't consider a 30 year time frame urgent. That may be a big part of the problem in itself?
Jan 10, 2013 9:25PM
Let's just get past the idea of the spendthrifts in congress and the white house blowing the bulk or what workers paid into the system and replaced it with IOUs that they now can't/don't want to honor.  That money is gone and the current government isn't smart enough to allow the economy to grow enough to replace it.
Presuming that the country will survive this administration intact; and we really want to "FIX" social security...
First, include in the code provisions that will keep their greasy fingers from stealing any more.
Second, return it to being a "retirement program".  There was never enough collected to make both promised retirement payments to workers AND "disability" payments to people who never paid a dime into the system.
That done, why not just eliminate the income ceiling ($113,700 in 2013) for SS tax purposes and stick the funds in a true trust account.
That would dramatically increase revenues and at zero impact on lower income earners.
Reducing benefit amounts or increasing the retirement age, on the other hand, have a much more dramatic effect on, and are not fair to, lower income workers who have paid into the system for a lifetime with an expectation of a promise to be met.
Furthermore, most of those who will pay the tax all year are far less likely to be adversely impacted by it.
And finally; it satisfies the liberal blood-lust for "sticking it to the rich" (or at least, those who are seen as better off than others, regardless of how they got there).
The biggest trick to this (or any) suggestion for fixing SS is finding a way keep the people with a demonstrated inability to manage money (i.e., the government) away from the program.

Jan 10, 2013 9:25PM
At what point does common sense prevail?  How many of us voted in the last election as compared to the total population that is eligible to vote?  How many of us is active in determining our own direction and destination?  How many of us have our hands out for government subsidies?  SS needs to be put into a personal account based on your earnings just like taxes, the same rate for everyone with no "loopholes" or offshore shelters.  A lower limit can be set on the tax but "WE" need to vote on that issue and determine the limits.  Assisting the lower income population is necessary but there are many ways to support that activity especially personal contributions.  At what point do we decide that the gridlock in the senate and the congress is of our making, we continue to not be politically active, allow politicians to recieve funding from interest groups, legally but with our implicit approval both by funding their activies and not participating politically!  Their purpose is relelection, maintaining their jobs.  In Texas that is called BS!  Put up or shut up!!!!!!  Your country now has a group of politicians who cannot or will not make decisions and it is costing each of us while they continue with the arguments on what to do next and who is responsible.  Do not woulda, coulda, shoulda, it is a waste of time!  Become active or set on your backsides, it is your decision. And, do not blame it on the current President, this was inheritied as a result of years of a lack of political discourse and involvement by "WE", the general population.
Jan 10, 2013 9:18PM
Hundreds of posters have said it. Several congressmen have said it. "Pop the caps"! That ends the debate.
Jan 10, 2013 9:17PM

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


Jan 10, 2013 9:14PM
They took the wage cap off of medicare but not social security. 99% of us pay social security tax on all our wages. If they get rid of the $113K cap and everyone pays on all their wages it is my understanding that would save social security for 75 years. Why doesn't anyone address this!!???
Jan 10, 2013 9:12PM

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.

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