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Social Security: Keep It Solvent

With many boomers set to retire than workers paying for Social Security, something must be done to keep the program solvent—and soon.

For those of us in our 50s and years away from our retirement, the experts keep telling us—trust us, Social Security will be there. The most recent report from the federal government says the Social Security trust fund has enough money to pay for current level of benefits through 2033. After that date, benefits can only be paid at a 75 percent clip.

That’s a key date for me because that marks my 70th birthday when it makes the most sense to take your Social Security to earn the highest monthly benefit possible. Given I write for a living and rely on investments, I can work that long unlike someone who has a more physically demanding job.

The experts say that Congress won’t keep Social Security from being fully funded by then. In the 1980s, President Reagan and Speaker of the House Tip O’Neil worked out a deal to fund Social Security that led to changes pushing back the retirement age from 65 to 67. Payroll taxes were also raised to cover the shortfall.

Given the current political environment and what it’s likely to look like in the future, the two political parties don’t look like they’re willing to agree on what to serve for lunch in the Congressional cafeterias. It will be difficult for them to raise the retirement age or increase the taxes the wealthiest pay for Social Security.

The Disability Insurance Trust Fund of Social Security is scheduled to run out of money in 2016 and experts say the cost of making the program solvent over time is rising.

Congress needs to start acting soon because the longer solutions are put off in dealing with Social Security, people are going to lose confidence and the solutions may become even more painful. If the Social Security full retirement date is going to go up beyond 67, best to do so soon and let future retirees plan around it.

The most recent analysis of the Social Security Trust Fund done by the Center for Retirement Research at Boston College shows the challenges faced by the program.

Since Social Security is funded on a pay-as-you-go basis, the cost will be driven up by the retirement of baby boomers. The ratio of workers to retirees is expected to go from 3 to 1 to 2 to 1.

Through 2009, Social Security was running cash surpluses, says Alicia Munnell, the center’s director. Those surpluses, because of the reforms enacted in 1983, were expected to last several more years, she says. That’s no longer the case because of the Great Recession

Munnell says that shift from annual surplus to deficit means that Social Security is drawing from interest on trust funds to pay for benefits sooner than expected. As soon as 2020, both taxes and interest are short of annual payment benefits, she says.

What are some of the options that would help address the problem? Munnell says that raising the payroll taxes by 2.88 percentage points—1.44 percentage points for each the worker and employer—would cover the existing benefit package through 2088.

Blame a lot of what’s happening with Social Security on the economy and industry. The Social Security reforms in the 1980s were expected to deal with the problem for a longer period.

“A worsening of economic assumptions—primarily a decline in assumed and productivity growth and the impact of the recent recession—has also contributed to the increase in the deficit,” Munnell says.

Social Security put itself into a bind where we have a pay-as-you-go system because of the payouts to those who fought in World War I and suffered loses in the Great Depression, Munnell says.

While that decision to pay benefits that far exceeded contributions was viewed as good public policy, “the cost of that decision was to forego the buildup of a trust fund that accumulated interest would have covered a substantial part of today’s benefits,” Munnell says.

The result from that is it raises the question of whether current and future workers should be asked to pay the higher payroll taxes to cover that past decision, she says. The problem, however, is that payroll taxes place a “significant burden” on low-income workers, she says.

An alternative to deal with that problem is shifting the cost of that financing problem to the personal income tax rather than the payroll tax, Munnell says. It wouldn’t be cheap and have to increase 4.6 percentage points from 19 percent to 23.6 percent, but it would be more equitable, she says.

“Such an increase would be extremely difficult in today’s political environment,” Munnell says.

Munnell says changes are doable given past history. Defense spending, for example, fell by 2.2 percent of GDP between 1990 and 2000 but rose by 1.8 percent of GDP between 2000 and 2010.

“While Social Security’s shortfall is manageable, it’s also real. The long-run deficit can be eliminated only by putting more money into the system or by cutting benefits. There’s no silver bullet. Despite the political challenge, stabilizing the system’s finances should be a high priority to restore confidence in our ability to manage our fiscal policy and to assure working Americans that they will receive the income they need in retirement,” Munnell says.

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