The Best Way To Fix Social Security

By Matthew Frankel, Selena Maranjian, Sean Williams, and Dan

Source: AFGE via Flickr

According to the Social Security Trustees' Report, the money coming in to Social Security won't be enough to cover its obligations beginning in 2033. Pretty much everybody in both political parties agrees that something needs to be done to fix this, but so far nobody has been able to agree on a solution. We asked four of our contributors how Social Security should be fixed, and here is what they had to say.

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Sean Williams: To be clear, there is no perfect fix for Social Security; because if there was we'd probably have implemented it by now. However, one strategy to consider is raising the full retirement age beyond the current cap of 67 years for those born in 1960 and later.

Why raise the retirement age? People are living longer than ever, and if they're able to draw payments from the Social Security Trust for many years it can exacerbate the cash outflow problem that the Fund will soon experience. Raising the retirement age would, in theory, encourage people to work longer, save more of their money, and contribute more into the Social Security program through payroll taxes. Consumers would more than likely prefer a larger payment come retirement, thus waiting until age 68, 69, or 70 to collect full retirement benefits (i.e., being paid 100% of the benefit you're due) could curtail the length of time the program is required to pay benefits to retired workers.

As with all ideas to fix Social Security there are downfalls. The big concern with raising the retirement age is that it could further harm the lower-income Americans that the program was designed to protect. Low-income Americans may not have the ability to wait to hit their full retirement age, and thus could be subjected to a substantially smaller payout with which to live off of the remainder of their lives. It's possible a minimum monthly benefit that's above the poverty level could be instituted, but this again could work against the need to reduce the cash outflow of the program.

Nonetheless, I believe it's a feasible idea worth consideration to fix what looks to be an imminent shortfall in the program by 2033.

: The suggestion of raising the full retirement age would help eliminate the Social Security shortfall, but it's extremely unpopular. In fact, 65% of the population opposes a relatively small increase in the full retirement age to 68. As a result, it seems unlikely to gain political traction.

I think the best solution to the problem will be a combination of issues. While the exact combination is anyone's guess, here's one that would do it, using data from the National Academy of Social Insurance (NASI):

  • Gradually increasing Social Security taxes from the current rate of 6.2% to 7.2% over a 20-year period for both employers and employees would eliminate 52% of the projected shortfall amount and is supported by 83% of Americans.
  • Eliminating the Social Security tax wage cap isn't likely to happen, but increasing the cap to $230,000 roughly double its current amount would affect just the top 6% of earners and would take care of another 29% of the shortfall.
  • Changing the method of calculating cost-of-living adjustments from CPI to the slower-growing "chained CPI" would reduce the shortfall by 20%.

There are several other possible solutions, and this is just one possible combination that would offset the shortfall in Social Security's funding. Unpopular methods such as across-the-board benefit cuts and means-testing Social Security are unlikely to happen, but there are many combinations to bridge the funding gap that are actually popular among the American public.

Selena Maranjian: One effective way to strengthen the Social Security system is to increase the tax rate we pay to support it. That might not sound like an appealing prospect, but sacrificing a little more now, while we're working and earning, can be well worth it if it results in much-needed guaranteed income in retirement.

The current tax hit for most American workers is 6.2% of earnings, with employers kicking in another 6.2% into the system, for a total of 12.4%. (Self-employed folks pay the entire 12.4%, which can make that 6.2% tax rate seem more attractive.) In a 2013 report, the nonpartisan National Academy of Social Insurance (NASI) suggested raising the tax rate by one percentage point, to 7.2%, and doing so gradually over 20 years. They estimate that this would shrink the Social Security financing gap by 53%. Hiking it to 7.2% in 2022 and to 8.2% in 2052 would shrink the gap by 77%.

The Washington Post and the Center for Retirement Research, meanwhile, have suggested that Social Security's funding shortfall would be 100% repaired if the total tax were upped from 12.4% to 15.3%, with most workers seeing their share of the rate rise by 1.45 percentage points, from 6.2% to 7.65%.

These increases should seem relatively minor to many of us, but they could have a meaningfully tough effect on people with low incomes. Still, hiking the tax rate is a powerful way to fix the system.

Dan Caplinger: Social Security is confusing to many people, and unfortunately, some of the strategies that are available to maximize benefits under the program are even more complex. Techniques like the file and suspend strategy and making a restricted filing for spousal benefits help smart retirees make more from Social Security, but some see them as offering lucrative loopholes to a select set of Social Security participants who can afford to do things like deferring their retirement benefits in exchange for greater payments in the future. By contrast, those who can't afford to pursue these lucrative strategies have to miss out on their positive impacts. That fundamental inequality troubles many policymakers, especially those who think that Social Security should be more progressive in its support of lower-income households and less worried about how well upper-income retirees fare with their monthly payments.

Taking away file and suspend, restricted filing, and other more advanced Social Security techniques wouldn't necessarily make a huge financial difference for the program, but it would make more of its participants have greater confidence that Social Security's rules weren't somehow stacked against them. Moreover, by making Social Security simpler to understand, more people could take the effort necessary to find more conventional ways to make the most of their benefits under the program.

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