Under Construction

Richard Quinn

TO MY WAY OF THINKING, it is inexcusable that we’ve reached the point where there’s even the possibility that Social Security may not be able to pay full benefits 16 years from now. Americans are scared by the prospect. Some have even given up hope that the program will continue to exist.

Back in 2000, Social Security’s Trustees urged action: “In view of the size of the financial shortfall in the [Old-Age, Survivors and Disability Insurance] program over the next 75 years, we again urge that the long-range deficits of both the [Old-Age and Survivors Insurance] and [Disability Insurance] Trust Funds be addressed in a timely way. It is important to address both the OASI and DI problems well before any necessary changes take effect, to allow time for phasing in such changes and for workers to adjust their retirement plans to take account of those changes.”

Similar warnings, urging action sooner rather than later, are contained in every Trustees report since 2000. And yet nothing significant has been done to solve the problem. To apply another band-aid, Congress in 2017 authorized the temporary reallocation of the payroll tax from the old-age fund to the disability fund for years 2016 through 2018. That was because the disability fund was running out of money sooner than the old-age trust.

It isn’t hard to craft a balanced combination of changes that will fix the problem. I cooked up my own solution using the calculator on the Committee for a Responsible Federal Budget website. These changes would make Social Security solvent for the next 75 years. You may have better ideas. But the point is, a combination of changes will easily fix Social Security and increase benefits. My proposed fix:

  • Increase initial benefits by 5%.
  • Raise the normal retirement age by one year to 68.
  • Change the index for cost-of-living adjustments to CPI-E, which more closely reflects retiree costs.
  • Increase the payroll tax by 2.5 percentage points, with half coming from each worker and half from their employers. It could be less for workers, but only if the payroll tax increase was greater on employers.
  • Apply the payroll tax to 90% of wages, while also increasing benefits for those who end up paying more in payroll tax. This still generates additional net revenue, because today’s Social Security benefit formula favors lower paid workers (or, to put it another way, higher earners effectively receive a lower return on the payroll tax they pay).
  • Cover newly hired non-federal government employees who currently do not contribute to Social Security. This should allow states to adjust their public pensions and lower long-term liabilities.
  • Apply the Social Security payroll tax to the cafeteria plans offered by many employers. When employees pay for health benefits offered through their employer, they pay with dollars that are not only income-tax-free, but also escape the payroll tax.
  • Diversify a portion of the Social Security Trust funds away from Treasury bonds and into other investments, including stocks, with a view to earning higher returns. Given the long-term nature of Social Security’s financial obligations, such a move would involve minimal risk.

With the above plan, no current retirees are harmed, while the impact on current workers is modest. Nobody likes higher taxes of any kind. But let’s face it: Social Security is part of our social and economic fabric. Americans will continue to rely on Social Security for a significant portion of their retirement income—and we need to agree on a fix.

Richard Quinn blogs at Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include Get Me the DoctorRunning in Place and Tortoises Needed. Follow Dick on Twitter @QuinnsComments.

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