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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First of all there should be no limit on the Social Security tax. Second under the Clinton Adm. when everyone was working after 65 you could work and draw this should stop or lower. Third using Social Security funds for anything other than what it was intended for should stop.
Johnson put Social Security in the General Fund and the Congress has been rapping it ever since. Yes I know they pull out the surplus and issue a Bond the only problem is we are almost broke and the Bond will be worthless. This money should not be part of the General Fund it is not the Governments money to play with.
The last thing give our Congress a modest retirement and put them on Social Security they will fix it in no time.
Stop giving money to Country that Hate Americans in the first place and pay our bills first and foremost.
Stop already talking about the fund being "solvent". It isn't. The government has LOOTED the fund and replaced it with WORTHLESS IOUs. In order to pay the IOUs they have to BOWWOR the money from CHINA.. If my employer pulled a stunt like that he would be wisked off to JAIL The "Trust Fund" is now a PONZI scheme. And tell the a$$holes in government it is NOT an "entitlement program".
As I have said to friends many times, get rid of the $ 120,000.00 cut off for paying in to the system. That would certainly increase the cash flow in. No one would get a huge monthly check because of it though. Their employer pays on 100% of their earnings so they should too.
The government has taken 2.7 trillion dollars (as of 2011) and wasted it on dumb projects.
Now they want to avoid paying it back.
They will use hocus/pocus to fool the american public.
That is easy to do since they have made it this far with very little push back.
Get the fact!!!
Take the cap off. Currently I think that withholding stops after you make $110 K. If you make 700.00 or 7 million you
pay in. Also the Congress is forbidden to borrow from it like they have in the past.
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