10 Choices Facing the Country about the Future of Social Security - dummies

10 Choices Facing the Country about the Future of Social Security

By Jonathan Peterson

Copyright © 2015 AARP

Social Security faces a shortfall. To pay benefits, Social Security will increasingly rely on its trust funds because revenues from the payroll tax aren’t sufficient. After about 2033, the trust funds will be exhausted.

Whether to increase the earnings base

The earnings base has historically served as a limit on the payroll taxes that you and your employer each pay to the program.

Most workers earn less than the cap. But in recent decades, a small percentage of workers has been earning a growing share of total U.S. income. Raising the earnings base is a way to boost revenues for Social Security.

The argument against increasing the earnings base is that high earners already get less of a return on their contributions because Social Security benefits are progressive by design.

Whether to cover more workers

The largest group outside the system is about 25 percent of state and local government employees who rely on separate pension systems and don’t pay Social Security taxes. Bringing newly hired state and local government workers into Social Security would help raise extra revenue.

State and local governments may oppose such a measure. Every dollar diverted to Social Security is a dollar lost by public pensions.

Such a proposal, however, would bolster Social Security’s finances and simplify administration of benefits. Newly covered public employees would also benefit from disability and survivor insurance.

Whether to raise taxes

Raising Social Security payroll taxes would eliminate much of the problem and polls well with the public. Critics voice concerns about the economic impact of higher payroll taxes and the possibility that employers may respond to a higher tax by cutting other payroll costs, such as jobs.

Another approach would be to tax contributions to all salary reduction plans. Extending the Social Security payroll tax to all such areas could reduce the shortfall by 8 percent.

Whether to cut benefits

Benefit cuts are nothing to cheer about, but they would save money. Further, they could be structured in a way that doesn’t hurt current retirees, soon‐to‐be retirees, and low‐income individuals.

The formula that calculates benefits could be altered in a manner that protects individuals who depend most heavily on benefits, while landing hardest on those who can afford the change.

Still, a targeted reduction in benefits could undermine the broad public support for Social Security as a program in which everyone pays in and everyone gets benefits.

Whether to modify the inflation formula

Social Security benefits are adjusted to keep up with the cost of living. One proposal to save money would be to use a measure known as the chained CPI. The chained CPI builds in the idea that consumers switch their purchases if the price of a particular good goes up too much.

Unlike most savings proposals, an index that brings smaller inflation increases would affect current beneficiaries, albeit gradually, as well as future ones.

Opponents say a chained CPI may not reflect the reality of older consumers. They spend a lot more on healthcare than young people do, and costs are rising fast. These reductions would mean a larger benefit cut over time.

Whether to raise the full retirement age

When Social Security was created, a newborn male wasn’t expected to reach 65. But for those who survived to adulthood, many lived into their late 70s and beyond — fewer than today, to be sure, but the gap isn’t as wide as some imagine.

Nor has everyone benefited equally from increases in longevity. Lower‐income, less‐educated workers haven’t enjoyed the same gains in life expectancy.

A related proposal would index Social Security benefits to increases in life expectancy. This would provide lower monthly benefits to compensate for the fact that people are generally living longer.

How to treat women more fairly

Many households no longer fit that model of the family with a male breadwinner and a stay‐at‐home mom.

One way to make Social Security fairer for working women would be to provide earnings credits for at least some of the time spent caregiving and raising children.

Another proposal would credit each spouse in a two‐earner couple with 50 percent of their combined earnings during their marriage. This approach, known as earnings sharing. Earnings sharing, however, could create new problems. Benefits for many widows could be reduced, unless such a proposal were designed to prevent that, adding to its cost.

Whether to divert people’s taxes to private accounts

Free‐market advocates have long pushed to make Social Security more of a private program, in which some of your payroll taxes go into a personal investment account.

Supporters believe that your returns in the stock market would make up for cuts in your benefits. You would own the assets in your personal account and could pass them on to your heirs.

The argument against this strategy is that it would erode the basic strength of Social Security, which is a guaranteed benefit you can count on.

Whether to create a minimum benefit

Social Security no longer has a real minimum benefit. This means that low earners may end up with benefits that are still below the poverty line.

In theory, the Social Security Administration could set a floor for benefits or include credits for unpaid work, such as for caregiving. Also, a minimum benefit could be indexed to wage increases.

However, a minimum benefit would cost money at a time when Social Security needs more of it. Further, it would weaken the relationship between contributions and benefits that has been so important to the program’s success.

Whether to give a bonus for longevity

The oldest Americans are often the poorest. Hiking their benefits through a longevity bonus is one idea for how to help them.

This proposal isn’t about saving money. For example, if a longevity bonus were offered 20 years after eligibility, it could increase the long‐term Social Security shortfall by 8 percent. That’s the argument against the bonus or to limit its size.