The new Congress is likely to duck Social Security reform

Now that the midterm elections are behind them, lawmakers can shift their focus to crafting an agenda for the 114th Congress that starts in January. But don’t expect it to include Social Security reform.

With solid majorities in both the House and Senate, Republicans are unlikely to squander their newfound clout on an issue as controversial as Social Security reform. Besides, there is no urgency.

The latest Social Security Trustees’ report projects the system has nearly 20 years before surplus revenue in the retirement trust fund are depleted in 2033. At that point, if Congress does nothing, there would be only enough revenue from payroll taxes to pay about three-quarters of promised benefits.

But it is unlikely that Congress would ever let that happen. Social Security is one of the most popular and successful government programs in history and senior citizens, who rely heavily on its benefits, tend to vote in higher percentages than the rest of the population.

However, that doesn’t mean Washington won’t be buzzing in the interim with proposals, position papers and polls on how to shore up the nation’s retirement program through a combination of tax hikes and benefit changes.

A recent online survey of more than 2,000 adults conducted for the National Academy of Social Insurance found that the vast majority of respondents support closing the Social Security system’s long-term financing gap through higher payroll taxes rather than by cutting benefits.

“MORE IMPORTANT NOW’

A majority of respondents — 85% — agreed with the statement that “Social Security benefits now are more important than ever to insure that retirees have dependable income.” The results were consistent across all generations, income levels and party affiliations.

The survey, conducted by Greenwald & Associates, incorporated a trade-off analysis that allows researchers to calculate which package of Social Security changes is most preferred over the status quo and what proportion of participants prefer that package. The survey included 12 policy options and looked at the impact of each option on Social Security’s long-term financing gap.

The most popular funding solution would gradually eliminate the cap on earnings subject to Social Security taxes. Currently, only the first $117,000 in earnings are taxed and counted toward Social Security benefits. About 6% of all workers earn more than the cap, which is scheduled to increase to $118,500 in 2015. They and their employers stop paying into Social Security when they reach the cap.

For example, in 2014, workers making $150,000 a year stopped paying taxes when their earnings reached $117,000 in September, while someone making $1 million stopped paying in February. Eliminating the cap on the taxable wage base over 10 years would wipe out 74% of the system’s long-term financing deficit.

Another popular funding solution would gradually raise the 6.2% tax rate that employers and employees pay into the system to 7.2% over 20 years. The proposed tax rate would affect all workers but would be so gradual that workers earning $50,000 a year would pay about 50 cents a week more each year, matched by the employer. The tax rate hike would resolve about half of the long-term financing gap.

CUT EARNINGS CAP

The most favored reform package, preferred by 71% of respondents, would slowly eliminate the earnings cap and raise the tax rate to 7.2% from 6.2%. It would also boost Social Security cost-of-living adjustments to reflect the higher inflation seniors experience, according to the NASI report, “Americans Make Hard Choices on Social Security.”

The embrace of higher cost-of-living adjustments for Social Security beneficiaries by most respondents is in sharp contrast to recent proposals making the rounds in Washington that would trim annual COLAs by adopting a different measure of inflation known as the chained CPI.

The combined package of tax hikes and benefit increases would offset 113% of Social Security’s financing gap, meaning that it would eliminate the entire gap and result in money left over for a margin of safety.

One of the policy options considered in the survey was a means test that would reduce or eliminate Social Security benefits for higher-income retirees. A majority of the survey respondents — 60%— opposed means testing.

Social Security has never been means tested. Workers have always earned the right to receive benefits by paying Social Security taxes throughout their careers. (Higher-income retirees do pay taxes on a portion of their Social Security benefits, however.)

Raising the full retirement age beyond 67 for those born in 1960 or later also drew opposition. Nearly two-thirds of respondents opposed increasing the retirement age to 68 and three-quarters opposed increasing it to 70.

When the full retirement age is higher, the reduction for starting benefits early is proportionately larger. Increasing the full retirement age to 67 from 65 resulted in a 13% benefit cut. Boosting the full retirement age to 68 would reduce benefits by another 6% to 7% for younger workers. Raising it to 70 would reduce monthly benefits by yet another 21%.

Granted, the sooner Congress acts — even if it means taking a backdoor approach by appointing a bipartisan commission to do the heavy lifting — the longer the country will have to adjust to any proposed tax or benefits change, making Social Security reform more palatable. But don’t hold your breath next year.

(Questions about Social Security? Find the answers in my e-book at InvestmentNews.com/mbfebook.)