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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 10:20AM
Republicans don't want any fixes to social security (along with medicare) so any attempt to negotiate fixes would be a huge waste of time. The ONLY fix republicans want is to get their foot in the door toward getting those trillions of bucks into social security wall street stock market accounts. It's obvious who that benefits and it sure as heck isn't workers who rely on social security in old age and would be forced to gamble in the stock market. Don't forget that over half of the working class has nothing else.  If that should happen the only consolation is that a huge number of republican working class extreme right wing A..hole voters will be screwing themselves along with everyone else. 
Jan 11, 2013 10:19AM
Jan 11, 2013 10:18AM
And today s people in Government are still trying to pull the wool over the eyes of The People. Most don't think we the people can read or write. They steal and ponder all the wealth of our grate Country. And lets not forget there $900.00 pay raise on Jan 1, 2013. Where in the world did that come from????
Stop giving money to Country that Hate Americans in the first place and pay our bills first and foremost.

Jan 11, 2013 10:18AM

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".

Jan 11, 2013 10:17AM
The fastest most necessary correction needs to be done immediately. Stop placing every foreign national over the age of 65 who comes to reside in the US on Social Security and Medicare. They have never paid into it but they get to drain it. They should be forced to pay for Medicare and shouldn't get food stamps or Social Security. I see this all the time and it makes me sick. It used to be that sponsorship was mandatory for foreigners coming here to reside and that type of responsibility has to be re-established now.

Jan 11, 2013 10:16AM

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.


Jan 11, 2013 10:14AM
You just don't get it....If you aren't in the 1% you aren't Republican....They don't represent you.....

Jan 11, 2013 10:13AM
We need to continually vote out incumbents.....and that means you too Republican voters
Jan 11, 2013 10:12AM
THE biggest suckers in this country are the white middle class who has developed narcissistic, guilt insecurities about themselves and others, The contributions of generations to build this country is now threatened by these soulless, brainwashed progeny of the "greatest?" generation. The baby boomers have created their own demise, much like in Ghost Busters! our children are the problem. Educated by progressive Marxist teachers that we allowed to take over our schools, and politicians who have taken over our government, while we cry and whine about political correctness. 
Jan 11, 2013 10:12AM
What about those who draw off what a spouse paid in, but never paid in themselves?  Or those who can draw off the amount a spouse paid in if it is more than they are due on their own pay-in?
Jan 11, 2013 10:10AM
Common Sense?  Someone needs to go to Washington and explain the meaning of the word, on the Hill and in the White House. 
Jan 11, 2013 10:09AM
We could save a considerable amount of money if we stopped giving Social Security Disability to drug addicts and alcoholics who probably never contributed to Social Security better still work. It's outrageous that they get a host of government benefits without a dead line to either get themselves clean and get a job or lose benefits. They should have the same limited amount of benefits that many states impose on parents without a means of supporting themselves.
Jan 11, 2013 10:07AM

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!!!

Jan 11, 2013 10:06AM
There is NO common SENSE in progressive circles in DC, just political war on the white middle class. AnYthing we get or paid, PAID into is broke, has been robbed by the demonrats over the years, redistributed by Obama and IS the problem! the white middle class that built this country is the problem in the view of Marxist progressives like Obama.  Social Security, Medicare, savings, retirements, investments, 401's, IRA's whatever, the politicians have given??? us, they take away, it is the biggest shell game in the world. OH here, pay into THIS and you all will be safe!!! NOT, WE lied! we took your money and gave it to the UNIONS, teachers, and NAACP, and the illegals. for votes!!!! screw you citizens, your all stupid.
Jan 11, 2013 10:05AM
Excellent....and while we're saving SS, here's how we fix the debt; Divide the nation's spending by the nation's income to find the percentage of TAX that EVERYONE must pay to finance a balanced annual budget (hint....21 percent). Add the amount necessary to pay off the national debt in fifteen years (hint .... 6 percent). Revise the tax code where everyone....EVERYONE...pays this 27 percent. Corporations, zillionaires, paupers, all pay an averaged 27 percent for fifteen years, and we get back to even with our budget satisfied and balanced. This assumes of course that the MORONS in Congress can keep their hands off the money, stay out of meaningless war, and cease the theft they call "pork". Or..we can go along like things are and the percentages will grow with every uptick of the debt clock. Our choice. 
Jan 11, 2013 10:02AM
All that needs to be done to fix social security is to put all of Congress, the Senate the President and all government employees on the same program that they give us.....Same health care programs too.....If not they need to be voted out of their entitlements
Jan 11, 2013 10:00AM

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.

Jan 11, 2013 9:54AM

Stop the ranting here and call or write your legislators and tell them if they touch SS or Medicare to fix the deficit that you'll vote them out!


Google Ronald Reagan and SS and watch the video where he unequivocally and emphatically states in an address that "SS has nothing to do with the deficit!".

Jan 11, 2013 9:52AM

“ Social Security has not contributed to the deficit…because, by law, expenditures cannot exceed earmarked revenues.” - The author expresses their naivety here. The Feds have borrowed from Peter (Social Security) to pay Paul (operating expenses) in perpetuity. When it comes time to pay Peter (Social Security) in addition to Paul...It is going to get very ugly around here. That 2% reduction in payroll taxes for two years was a brilliant give-away by this administration, as the lost Social Security Revenue is completely invisible on the books.

Jan 11, 2013 9:51AM
Maybe our do-nothing president and congress need to address thiings they can fix, budget and SS, instead of trying to save and police the world, and outlaw guns. Raise SS tax another 2% and keep their fingers out of it.
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