A Blueprint For Stabilizing Social Security

Due to the nature of the Social Security program there is an impending bottleneck coming up where the trust fund that has been built up will be depleted and incoming payroll taxes will not be enough to cover full promised benefits.  It looks like 2034 is the magic year in which this is projected by the Congressional Budget Office and at that point in time the incoming taxes are projected to cover about 3/4 of benefits.  Luckily for us this is 20 years away and Social Security funding has several variables and with some slight tweaks we can work towards stabilizing Social Security.  While researching methods to fix Social Security I came across this calculator which allows you to play with the Social Security formula to come up with solutions.

There will of course be some people who want to just hike taxes and some who want to just cut benefits.  To make Social Security solvent, meaning the trust fund won’t be depleted for at least 75 years AND at that point revenue will be greater than expenditures, the payroll tax for everyone would have to be increased by 4.7% total if an increase in tax rate were the only option used. I think this would be very painful for the country, and especially for low income earners. To make it solvent on benefits cuts alone, initial benefits would have to be cut by 28.3%, once again very painful.These are the two main numbers to attack, but there are other options as well.

My Plan For Stabilizing Social Security

From a  mathematical perspective I think a balanced approach is necessary. In my Social Security fix, if I were the ‘benevolent dictator of the country’ I would enact the following:

1. Make all earned income pay the Social Security tax: Currently Social Security taxation stops at $114,000 per year.  If all earnings were to be subject to Social Security tax, a large portion of the shortfall would be eliminated.  Now, if this were lifted then the earnings would increase how much top earners would receive in future Social Security benefits.  With this move alone it would be 2065 before the trust fund ran out, and it would result in a 14% cut in benefits at that time.

2.  Modify cost of living adjustments to chained CPI:  Although a more extreme option exists of making the COLA be CPI – 1%, I think just switching the chained CPI is a more balanced approach and will result in less of a shock.  With how low interest rates have been, and thus CPI the last few years, I doubt anyone would notice a substantial effect. Adding this on top of eliminating the income cap would make the trust fund last until 2085, and would then result in benefit cuts of 13%.

3. Increase the retirement age from 67 to 68: People are living much longer than when Social Security was originally founded.  In the 1980s when the age was raised from 65 to 67 it was done so gradually. doing this again to raise the age from 67 to 68 would make sense. People are living longer and for the most part, more people are working in less physically demanding jobs than our parents, grandparents and great grandparents, which in turn allows us to work longer.   Adding this into the mix eliminates the 75 year shortfall, however in 75 years revenues would be 35% less then expenditures, so although solvent, the program is not permanently sustainable.

4. Slow Benefit Growth for top 1/2 of earners: This is the most painful change that I am proposing, but it is most in line with the original intent of Social Security. Social Security was designed to be supplemental to pensions, individual savings and family assistance, it was not designed to provide a middle class lifestyle for retirees.  In this proposal, which is reflective of the Simpsons Bowles commission report in 2010, the benefit brackets would be changed from 90%, 32%, 15% to 90%, 30%, 10%, 5%.  Essentially higher earners would see a much smaller payback than they currently do.  This move brings Social Security more in line with a social insurance program than as an investment portfolio or an entitlement.

Additional Thoughts

Social Security is the third rail in politics and I doubt any substantial changes will be made to increase its long term solvency, similar to the national budget.  I thought about throwing in the option of allowing some of the Social Security trust fund to be invested in the stock market to boost returns, but I am not fond of the idea of the government owning large chunks of corporations.  I also am not a huge fan of the Social Security trust fund essentially being a mechanism to ensure there is a buyer for government debt, but that is neither here nor there.  Social Security was designed to be, and should remain, a tool to keep America’s elderly out of poverty.

I think that people should focus more on creating a nest egg for themselves then relying on the government, and over the last 30 years the working public has received many excellent tools to help with this, including the widespread use of 401Ks, IRAs, and HSA funds, as well as the birth of the index fund market and online self directed retirement accounts.

What changes would you make to work towards stabilizing Social Security? Are my suggestions crazy?