E-Mail this Article

Making tough decisions to fix Social Security

Mar 9, 2014 @ 12:01 am

By Mary Beth Franklin

+ Zoom

Although politicians in Washington can't seem to agree on anything, many individual citizens have plenty to say about how government could be improved and where tax dollars should be spent.

Fixing Social Security is a good place to start.

Now everyone has a chance to star in an updated version of “Mr. Smith Goes to Washington” by using the innovative policymaking simulation tool at vop.org. The interactive tool was developed by Voice Of the People, a new nonpartisan organization that seeks to give “we the people” a greater voice in government.

I hope that if people realize that Social Security reform is a relatively simple mathematical fix, they will be less likely to grab reduced benefits at 62 out of fear that their future benefits are in jeopardy.

Once users log on, they get a briefing on the long-term financial challenges facing Social Security, evaluate arguments for and against various policy options, and decide which reforms they want Congress to adopt. The whole process takes about 15 minutes.

Users may be surprised how they might have to adjust their initial responses once a price tag is attached to each option.

The goal is to design a package of reforms that fully funds Social Security beyond 2033, when the current revenue surplus is forecast to run dry. After that, payroll taxes will generate only enough revenue to pay about 77% of promised benefits, resulting in a 23% across-the-board cut to beneficiaries if Congress fails to act.

The projected Social Security trust fund shortfall is caused largely by demographics.

Americans are having fewer children, so the number of workers per retiree is going down. At the same time, we are living longer and thus receiving Social Security benefits for more years.

In 1960, there were five workers for every retiree. By 2000, that ratio had slipped to 3.4 and is projected to drop to 2.6 by 2020.

Meanwhile, U.S. life expectancy will have grown from 63.6 years in 1940, when Social Security first paid benefits, to a projected 79.5 by 2020.

MY SOLUTION

I rejected a series of proposals that would reduce benefits for higher earners in the future. Although it could have cut the shortfall by up to 35%, I embraced the argument that American workers have been paying into Social Security all their lives with the promise of getting it back in the form of benefits.

Cutting benefits for higher earners beyond the already progressive Social Security benefit formula would violate that promise and risk converting Social Security from an earned benefit to welfare.

Instead, I agreed to increase the full retirement age gradually to 68 by 2034, one year later than under current law. That change would trim the projected trust fund shortfall by 16%.

Workers could still claim reduced benefits as early as 62, but the reduction would be larger than today.

I also agreed to remove the cap on taxable wages.

Currently, only the first $117,000 of wages and net self-employment income is subject to the Social Security taxes, but all earnings, including those above the cap, are subject to Medicare taxes. Putting the Social Security portion of the payroll tax on par with the Medicare portion would put the onus on higher-income earners, who would be better able to afford it, while wiping out a whopping 72% of the funding shortfall.

Currently, both employers and employees pay 6.2% of all wages and salaries up to $117,000 to fund Social Security, and 1.45% of all earnings to fund Medicare. Self-employed individuals pay a combined rate of 12.4% for Social Security and an additional 2.9% to fund Medicare.

GRADUAL INCREASE

Several of the proposals would gradually raise the Social Security tax rate to 6.6% or higher. But I rejected each of them, thinking that raising the tax rate is bad for employees, especially people who are living paycheck to paycheck; that it would harm the economy, as workers would have less money to spend; and that it would hurt employers, who share the cost of the higher tax rate that would apply to all employees, not just higher-income workers who would be affected by an increase to the taxable-wage base.

I agreed to update the method for calculating annual cost-of-living adjustments by switching from the traditional consumer price index method to a chained CPI that would increase future benefits at a more modest rate. That would cut the trust fund shortfall by 20%.

Together, my proposed package of gradually raising the full retirement age by one year, eliminating the cap on taxable wages and altering the method of calculating future cost-of-living adjustments would wipe out the projected shortfall and then some.

How did you do? Maybe we should compare notes and invite our political leaders to join the conversation.

If we can make tough decisions, why can't they?

RIA Data Center

Use InvestmentNews' RIA Data Center to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

Upcoming Event

Nov 11

Webcast

Capitalizing on volatile markets: Strategies for finding returns

With money in motion, advisers need a game plan. You need a strategy with an established track record and something that can empower your clients in volatile market conditions. It may be time for you to adopt a true stockpicker's approach.... Learn more

Accepted by IMCA for 1 CIMA®/CIMC®/CPWA® CE credit.

Get Daily News & Intel

Breaking news and in-depth coverage of essential topics delivered straight to your inbox.



The information entered on this page will not be used to send unsolicited e-mail, and will not be sold to a 3rd party.

REMINDER: This service is for personal use only. For commercial reprints, Web links and e-mailings please contact our Reprint Sales Manager at (732) 723-0569.

X

Subscribe and SAVE over 72%

View our best offer
Subscribe to Print