Washington Matters
An Unhappy Birthday for Social Security
Those who insist on blocking change to Social Security aren't doing future retirees any favors.
By Mark Willen, Senior Political Editor, The Kiplinger Letter
August 12, 2010
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A sobering thought for Saturday, when Social Security reaches age 75: Most young Americans don’t expect it to be around when they need it. The sobering truth is that they’ll be right if policymakers don’t make changes soon.
The good news is that this is one case where Washington seems to have gotten the message. Odds for a package of changes after President Obama’s debt commission makes its report Dec. 1 are good. But a preemptive challenge to any change by those who claim they want to preserve Social Security poses a threat that will have to be overcome.
Social Security remains on solid footing today, but the demographics are not in its favor. Neither is the economy. This year, for the first time ever, the government will pay out more in benefits than it takes in through payroll taxes. The estimated deficit of $41 billion is due mostly to the high unemployment that has forced more people to tap benefits early -- at age 62 instead of full retirement age. In their annual report, the Social Security trustees projected a return to surplus next year, but within 10 years the deficits will be close to $100 billion annually, as the ratio of people paying into the system vs. people collecting benefits keeps falling, to about 2-1 by 2035, from 16-1 in 1950. While technically there is enough in the trust fund to last until 2037, the trust fund is really just an IOU, and the government will have to borrow -- adding to the overall deficit -- to meet its obligations to retirees. But as everyone knows, federal borrowing is already too high.
That’s why it’s certain that the debt commission will propose several changes to keep Social Security solvent for the long term -- at least another 75 years. And chances are, opponents won’t be able to prevent Congress from acting. Once seen as the third rail of American politics, Social Security is now regarded as the low hanging fruit when it comes to reining in the debt, as Bill Bixby, head of the Concord Coalition, recently put it.
Fixing Social Security will certainly be easier than seriously slowing the growth in health care costs to save Medicare and Medicaid, deciding on tax reforms or cutting defense programs. But the fix won’t come without considerable pain. According to the Committee for a Responsible Federal Budget, the demographics produce a Social Security gap of 1.92% of taxable payroll over the next 75 years. So if the payroll tax were increased by that amount, the gap would close. But that’s an untenable step.
More likely is a smaller tax hike combined with a higher retirement age and smaller benefits, with means testing applied to both the tax hike and the benefit cut.
An almost sure bet is upping the normal retirement age to 68, which would close 25% of the 75-year projected gap. Some lifting of the cap on income subject to the payroll tax (say from $106,800 today to $200,000) is also likely.
More complicated -- and more controversial -- will be a lowering of anticipated benefit levels. Proposals for accomplishing that include increasing the number of years used to calculate benefits, from the 35 highest earning years to the 40 highest, and/or by changing the formula used to determine benefits and annual inflation adjustments so they track prices instead of wages, a slower rising approach.
Also possible: A program for private accounts as a supplement or carve out to Social Security, means testing of benefits based on wealth (not retirement income), incentives for working longer, changes in survivor and dependent benefits, expansion of the system to include exempt workers and many others.
It’s worth stressing that none of these changes will affect the benefits being received by current retirees, although their future inflation increases could be. Those very close to retirement are also likely to be exempt from most of the changes.
Expect Congress to take up the debt commission’s ideas next year, with Social Security reform more than likely by the end of 2012.
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Reader Comments (5)
Posted by: NOMEN at 08/17/2010 12:17:24 AM
I would like to see a social security tax on outsourced jobs. I would also like to see a tax on imports. Why? Because businesses are maximizing profits by eliminating jobs that would have paid into the social security fund. If they want to profit by selling their products here, they should be willing to manufacture here or pay a small penalty for not doing so.
Posted by: bob at 08/17/2010 07:26:23 AM
Something has to be done to save social security if that is in the best interest of the tax payer? Am not convinced that taxing the individual and corporation, driving many elsewhere, and returning 1.5% gain to the individual while they could easily have made 3x return safe and self directed is a good thing? In addition to poor return you are mandated by the same custodian who fails to fund your account with the rules of the game. Serious reform is needed and while doing so the outlandish public union pay and pension scheme needs to be benchmarked to the private sector with customary and reasonable compensation. The tax payer is on the hook for all of this and it is they who can stop it should they be willing.
Posted by: Thomas S at 08/17/2010 10:50:07 AM
I think there should be a heavy penalty when companies lay off American workers. This means companies would pay extra Socail Security tax on all their employees. The number would be a 20% a cross the board so Socail Security would stay a float. Also 50 % penalty if Amercian jobs are out source to China ,India and other countries. There needs to be fair guidelines on Social Securiy and more fraud protection. A task force that investigates Socail Securtiy crime and abuse to the system. It would act as stiff penalty for those people who abuse the system.
Posted by: xrugbyplayer at 08/26/2010 04:59:42 PM
In my first job of my career, in 1975, I jokingly asked my employer if I could not contribute to Social Security. They asked why, I said, I didn't trust the government to invest my money. Well, after working for 35 years, it turns out I was quite right. I have recently figured the amount that I and my employers have contributed to SS over the past 35 years with a conservative investment earnings of 5% each year on the principle contribution. I then started to deduct what the Social Sercurity Administration says would be my annual payout starting at age 66. With the 5% yearly earnings on principle, I would never run out of money as computed to 100 years of age. I'll be luck if SS will be around if I make it to 90. Never trust the government with your money!
Posted by: daveo at 09/03/2010 07:34:14 PM
How quickly people forget. This article claims that "This year, for the first time ever, the government will pay out more in benefits than it takes in through payroll taxes." This is quite wrong. The Social Security Trust Funds have been in this situation before, most notably in the period stretching from the late seventies up to the passage of the 1983 Amendments, when the OASI trust fund was only a few months away from running out of assets. See the net increase column of table VI.A.4 in appendix A of this year's Trustees Report, which you can find on the Social Security website. That table clearly shows that benefits have been higher than total income, not just payroll tax income, in the past. A more accurate way of describing the current situation is that for the first time since 1983, the government will pay out more in benefits than it takes in through payroll taxes.