The 3 Most Popular Solutions to Fix the Social Security Crisis

By Markets Fool.com


Source: Social Security Administration.

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Social Security, the federal program intended to protect low-income retirees, the disabled, and survivors of deceased workers,is in trouble. The perception of trouble is so widely held that a CNN/ORC International survey discovered that between 57% and 82% of Americans, depending on their age range, believed Social Security was "in crisis" or had a "major problem."

This crisis or major problem is the program's dwindling reserves. By 2033, the Social Security Trust Fund will have depleted the remainder of its extra cash, and benefits will have to be slashed by 23% (assuming Congress makes no changes to the program) so that eligible beneficiaries can continue to receive payments.

Why the sudden money shortfall? Baby boomers began retiring from the workforce in increasing numbers in recent years, which is lowering the worker-to-beneficiary ratio. In plainer English, there's just not enough new people entering the workforce (and paying payroll taxes) to counteract the retirement of baby boomers.

The other major "problem" is that we're living longer than ever. Longevity is a great thing in many respects, but Social Security is being strained asbenefits must be stretched out over a longer period of time.

12 ways to fix Social Security: Which would you choose?
Clearly something needs to be done, and the American people have some thoughts on what that "something" should be, according to a survey conducted by The Washington Post.

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Source: Flickr user Hobvias Sudoneighm.

With the help of the Center for Retirement Research, thePost set up an online survey in which Americans could dig into the pros and cons of 12 strategies for fixing Social Security(six cuts and six revenue increases) and select as many options as they felt would work. The Center for Retirement Research also laid out percentages for how much each optionwould reduce the Social Security funding shortfall andkeep full retirement benefits at 100%. Those percentages are listed in parenthesis below.

The 12 options are:

  • Cut benefits across the board today (100%)
  • Raise the full retirement age (20%)
  • Freeze the purchasing power of benefits (95%)
  • Freeze benefits on a sliding scale (55%)
  • Change the cost-of-living adjustment (20%)
  • Do nothing (but cut benefits when the Trust Fund reserves are gone) (100%)
  • Increase the payroll tax on everyone today (100%)
  • Raise the earnings cap (30%)
  • Use the estate tax to tax health benefits (35%)
  • Transfer start-up costs to general revenues (100%)
  • Raise the return on assets by investing in the stock market (20%)
  • Do nothing (but raise taxes when the Trust Fund reserves are gone) (100%)

If given the option, which one, two, or additional options would you choose to fix Social Security?

Got your answer?

With more than 4,000 responses logged, including my own, doing nothing and either cutting benefits in 2033 or increasing taxes in 2033 were the two least-liked options. Just 2% of respondents included cutting benefits in 2033 among their preferred options, while only 3% favored doing nothing and raising taxes in 2033. Ironically, though, removing these two options eliminates 40% of the strategies that would reduce the shortfall to zero.

America's three most popular Social Security fixes
So which strategies did respondents choose most often? Let's look at the top three in descending order.

3. Change the cost-of-living adjustment
Receiving a thumbs-up from35% of poll participants, the cost-of-living adjustment, or COLA, adjusts Social Security benefits annually to keep up with inflation.

Source: Flickr user Amit Patel.

The Social Security COLA is tied to the Consumer Price Index. One proposal, however, would link COLA to the Consumer Price Index for Elderly Consumers, or CPI-E, which is more reflective than CPI of the goods and services that senior citizens (who comprise the majority of Social Security beneficiaries) buy. Tying the COLA to the CPI-E would help ensure inflation does not erode retirees' benefits, and it would eliminate about 20% of the program's projected shortfall.

Unfortunately, using a revised CPI could hurt elderly Americans who are reliant on Social Security for a majority of their income. Being less inclined to adjust their spending habits could be difficult if the CPI-E reduced their benefits check.

2. Raise the full retirement age
Receiving the second-most votes at 45% was raising the full retirement age, or the age at which eligible beneficiaries can receive full benefits.

Source: Flickr user TheeErin.

The full retirement age was last legally amended in 1983, and the first increase did not occur until 2003. Ultimately, this amendment will boost the full retirement age age 65 to age 67.But boosting the full retirement age even higher could encourage people to work longer, save more money over the long run, and contribute more to the system (which would benefit from people waiting longer to take their benefits).

The problem? Social Security is first and foremost designed to protect low-income retirees. When are low-income retirees going to apply for benefits? Probably as early as possible (i.e., age 62). Pushing the full retirement age out to, say, 68 or 70 years of age, will only further reduce the benefits of low-income retirees who need assistance at age 62.

1. Raise the earnings cap
By far the most popular option, with support from 70% of the more than 4,000 respondents, was to raise the earnings cap on payroll taxes and make higher-income individuals pay more.

Source: TaxCredits.net via Flickr.

Per The Washington Post, an estimated 82.5% of all earnings are currently taxed by the Social Security program, with this year's cap at $117,000. This means individuals who make more than $117,000 per year won't pay any additional Social Security payroll taxes on each dollar past that point. Few workers actually earn more than $117,000, which means most people pay Social Security taxes on every dollar they earn. However, if 90% of all earnings were covered by Social Security taxes, then the earnings cap would swell to about $250,000.

Why is this strategy so popular? Simple: it only affects a small percentage of the population. The Social Security Administration estimates that the salary of just 5.7% of workers in the U.S. will exceed $117,000 this year. In other words, it wouldn't effect Social Security payroll taxes for an estimated 94.3% of the population, and it would reduce the estimated program shortfall by 20%.

The downside to this strategy is that upper-income workers who would becontributing significantly more to Social Security might not see much in the way of increased benefits when they retire over what they would be due under the existing earnings cap rules.

Do you agree with America's consensus opinion on how to fix Social Security? Share your ideas in the comments section below.

The article The 3 Most Popular Solutions to Fix the Social Security Crisis originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.