Looming Social Security insolvency (see Aug 5 blog) is a public policy crisis with many sensible solutions.

If politics is the art of the possible then saving Social Security will require democrats and republicans to hammer out a consensus among a range of possible options.

The first step comes from 2010 Nobel Prize-winning economist Peter Diamond: “The central question is how much do you do with benefit cuts and how much do you do with more revenue?” (Washington Post Interview, Oct 21, 2012).

In other words, the key to political consensus on a plan to restructure and save Social Security for generations to come is to strike a reasonable balance between tax increases and benefit cuts. Put simply, a final rescue package must include both payroll tax increases and Social Security benefit cuts—there’s no other way.

With that premise, here are 5 ideas to save Social Security—based on recommendations of the National Commission on Fiscal Responsibility & Reform (2010) and analysis by the Congressional Budget Office (2014). Revenue increasing measures come first, followed by options to pare benefits growth.   

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5 Ideas to Save Social Security

Wed Aug 13, 2014

Looming Social Security insolvency (see Aug 5 blog) is a public policy crisis with many sensible solutions.

If politics is the art of the possible then saving Social Security will require democrats and republicans to hammer out a consensus among a range of possible options.

The first step comes from 2010 Nobel Prize-winning economist Peter Diamond: “The central question is how much do you do with benefit cuts and how much do you do with more revenue?” (Washington Post Interview, Oct 21, 2012).

In other words, the key to political consensus on a plan to restructure and save Social Security for generations to come is to strike a reasonable balance between tax increases and benefit cuts. Put simply, a final rescue package must include both payroll tax increases and Social Security benefit cuts—there’s no other way.

With that premise, here are 5 ideas to save Social Security—based on recommendations of the National Commission on Fiscal Responsibility & Reform (2010) and analysis by the Congressional Budget Office (2014). Revenue increasing measures come first, followed by options to pare benefits growth.

1. Raise the taxable maximum wage base to restore the 1980s target of having 90% of covered earnings nationally subject to the payroll tax. CBO says that hitting the 90% target in 2015 would involve raising the taxable wage base from the projected $119,400 to $241,600. This means payroll taxes for someone earning that level (and for their employer) would increase by $7,600 or 102 percent. And total payroll taxes paid by the employee and the employer would be $30,000 annually—a substantial amount.

It’s important to note that bumping up the taxable maximum to $241,600, indeed even completely eliminating the taxable maximum, would not by itself save Social Security. CBO estimates that while eliminating the payroll tax cap (and also including the additional earnings in the computation of benefits) would dramatically increase the top earners’ payroll taxes, it would solve only 45 percent of the program’s long term actuarial financial imbalance.

And a smaller portion of the actuarial imbalance would be addressed if lawmakers increased the maximum wage base by a lesser amount or applied a Medicare Part D-type “donut hole,” triggering the taxable wage base off at some level and back on at a higher level.

2. Increase the payroll tax rate. Presently up to $117,000 in earnings is subject to a 6.2 percent combined OASDI payroll tax rate deducted from employee paychecks and a 6.2 percent rate paid by the employer. While the Social Security payroll tax is considered particularly regressive, since it takes a smaller bite out of the total earnings of the highest paid employees, many observers believe the idea of increasing the payroll tax rate needs to be on the table in any discussion of Social Security restructuring.

3. Raise the eligibility age for reduced and full Social Security benefits. Right now individuals are eligible for reduced benefits at age 62 and full benefits at age 66 (if born between 1943 and 1954) or age 67 (if born since 1960). With hardship exemptions for those unable to work past age 62, a Social Security rescue plan could recognize increases in life expectancy by gradually increasing eligibility ages, perhaps to 63 or 64 and 68 or 69 respectively for reduced and full benefits.

Of course, a higher eligibility age would need to be designed so as not to affect people nearing retirement, by, e.g., making higher eligibility ages effective only for those now under the age of 55.

4. Slow benefits growth for high-income earners. Senators and representatives almost certainly will examine the indexation formula the government uses to calculate individuals’ monthly benefits based on their average lifetime earnings. The Bowles-Simpson Commission cited above recommended making the benefit formula more progressive, i.e., slowing benefits growth for higher income earners.

5. Change the inflation index used for annual cost-of-living increases in benefits. Today the Social Security Administration uses the standard Consumer Price Index to determine annual Cost of Living Adjustments (COLA) for Social Security benefits. Some argue that the CPI overstates inflation and that the so-called “chained CPI” is more accurate. Switching to the latter index would slow future growth of Social Security benefits.

It should be noted that changing COLA formulas needs to take into account the financial dependence of lower-income people on Social Security. Indeed, the Federal Reserve Board just last week reported that 1 in 5 people between the ages of 55 and 64 have zero money saved for their retirement, a reality Congress must accommodate in putting Social Security on a firmer financial footing.

To be sure, a sixth idea also exists in regard to impending Social Security insolvency: do nothing and wait for a crisis. In many ways that’s what lawmakers and presidents have been doing since President Clinton said “save Social Security first” in 1998. Perhaps hyper-partisan politics has made elected officials risk-averse. In any event, “kicking the can down the road” has too often become standard practice for both political parties.

What makes Social Security different, however, is that further delay means our children and grandchildren will pay the price tomorrow for political inaction today.

It’s time for Congress and the President to act to save Social Security first.