Saving Social Security: Who do you blame? And who do you believe?

Former President Bill Clinton, in his own 1998 attempt at Social Security reform (AP Photo/Ron Edmonds) Former President Bill Clinton, in his own 1998 attempt at Social Security reform (AP Photo/Ron Edmonds)

Depending on who you talk to, the future of Social Security is either in the toilet or completely salvageable, so who do you believe?

The U.S. Social Security Administration’s 2012 annual report for Social Security reiterated what the report has said for two years, that the program “cannot sustain projected long-run program costs under currently scheduled financing, and legislative modifications are necessary to avoid disruptive consequences for beneficiaries and taxpayers.”

According to the SSA, the Social Security trust fund only has enough funds to pay full benefits through 2033, three years earlier than was projected in 2011. After that, it would have enough tax income to pay about three-quarters of scheduled benefits through 2086.

“Under current projections, the annual cost of Social Security benefits expressed as a share of workers’ taxable earnings will grow rapidly from 11.3 percent in 2007, the last pre-recession year, to roughly 17.4 percent in 2035, and will then decline slightly before slowly increasing after 2050,” the SSA stated.

Paying for Social Security BenefitsMost people agree something must be done to shore up Social Security, but how that is accomplished is a different story.

Politicians have bickered about Social Security for years, and while neither side of the political aisle advocates for scrapping the program, numerous proposals have surfaced that could extend the life of the program, depending on who you talk to.

The AARP highlighted the top proposals that have been put forth by politicians and others to save or fix Social Security, including raising the full retirement age to 68, raising the payroll tax cap and recalculating cost of living adjustments.

(Also read: Women rely heavily on Social Security in retirement)

Tiffany Lundquist, a spokesperson for AARP, said that her organization is not taking a position on any one proposal since there are no legislative proposals on the table currently to change the Social Security program. What AARP is doing is touting a new program called, “You’ve earned a say,” which makes sure “Americans are aware of the different options for Social Security and Medicare and understand what those options would mean for them and their families,” she said. “So going forward, when we see legislative proposals in Washington, Americans can make their voices heard about how they want it strengthened.”

Lundquist added that AARP is “making sure more Americans are engaged in the conversation and it is not just decisions being made by politicians in Washington.”

Next: The proposals

Reagan Social Security

House Speaker Thomas "Tip" O'Neill, right, leans forward to ask President Ronald Reagan a question during the Social Security bill signing ceremony on the South Lawn of the White House in April 20, 1983, with Alan Greenspan, head of the president's Social Security task force and Sen. Bob Dole, R-Kan. (AP Photo/Barry Thumma)

The Proposals

In 1983, Congress began a process that gradually will raise the full retirement age to 67 for those born in 1960 or later. Recently, it was proposed to raise the full retirement age even higher, leaving the early retirement age at 62. The caveat for taking early retirement would be that a recipient’s monthly benefit would be reduced even further, by about 6 to 8 percent, for each year that the full retirement age increases, according to AARP.

One proposal would raise the full retirement age to 68 by 2028, which would solve about 18 percent of the funding gap. Another proposal would increase the full retirement age by two months each year until it reached age 70 in 2040. According to the AARP, that would fill 44 percent of the funding gap.

Those in favor of the proposal say it is necessary because of longer lifespans. By forcing people to work longer or take reduced benefit over time, their retirement benefits wouldn’t have to last for as many years. Opponents say that raising the retirement age is a benefit cut that will hurt low-income workers.

Longevity indexing is another proposal that would automatically modify Social Security to pay smaller monthly benefits as lifespans increase, according to the AARP. Reducing the monthly payments could be accomplished by increasing the age at which a person becomes eligible for full benefits or by changing the formula.

Those in favor and those opposed to longevity indexing give the same arguments as for extending the full retirement age.

Recalculating the COLA is another proposal. Currently, the COLA is based on the consumer price index. One option would be to use a chained consumer price index, which would apply a different formula to the same goods and services data, but would lower retirement benefits over time. This would fill about 23 percent of the funding gap, according to AARP.

Using an elderly index would reflect specific spending patterns of older Americans, especially how much more they spend on health care, and would adjust the COLA higher to account for that. This option would actually increase the funding gap by 16 percent, according to AARP.

Increasing the payroll tax cap is another proposal that would aid the Social Security funding gap. Currently, the tax applies to annual earnings up to $110,100. Anything earned above that is not taxed for Social Security. Raising the cap to cover a higher percent of total earnings would help alleviate Social Security’s funding gap. Those in favor of the increase say it wouldn’t affect too many people because only 6 percent of the population make more than $110,100 a year, and it would help keep Social Security strong for years to come. Opponents say that raising taxes would impact how much money people would have to spend on their day-to-day expenses and would only hurt the middle class. They also say that the increase would only solve Social Security’s problems for about eight years and then something else would have to be done.

Other proposals include eliminating the payroll tax cap, reducing benefits for higher earners, increasing the payroll tax rate, taxing all salary reduction plans, allowing all newly hired state and local government workers to be covered by Social Security, increasing the number of years used to calculate initial benefits and beginning means-tested Social Security benefits.

Next: The politics

Bush Social Security

Former President George W. Bush also attempted to tackle the Social Security question, but got burned in the process. (AP Photo/J. Scott Applewhite)

The Politics

Mike Tanner, senior fellow at The Cato Institute, doesn’t believe the Social Security program will go away, but he calls the system a Ponzi scheme “if Ponzi had a gun. A Ponzi scheme breaks down ultimately because it can’t force people to contribute once the burden becomes too high, so then it collapses. Social Security can force people to contribute no matter how high the burden,” he said.

To bring the system into fiscal balance, you have to increase revenue or decrease payouts, Tanner said. “I think the answer there is to decrease payouts.”

One way to do that is to change Social Security’s benefits calculation from a wage growth model to an inflation-adjusted model.

Social Security uses a person’s top 35 years of income to calculate the amount of benefits they receive in retirement, he said.  The problem with that formula is that the wages that were earned 35 years ago are not the same dollar amount today, he said. Most people would adjust those early year earnings for inflation, which would revise the retirement benefit calculation down.

The way the Social Security system is currently set up, a worker who retires this year would receive higher benefits than the worker who retired last year, he said.

Using wage growth over 35 years “is a percentage or a percentage and a half higher than inflation rates,” Tanner said. Using an inflation-adjusted model would place everyone at the same starting point, which “would bring the system into balance.”

Doing this would make it a worse deal for younger workers because they would pay the same amount in Social Security taxes but receive fewer benefits than promised. To offset those losses, he recommends allowing younger workers to put some of their Social Security taxes into a 401(k)-style plan instead.

This would shift some of the risk from the government’s shoulders onto the individual’s. As some of that money shifts out of the program into a defined contribution plan, that would leave less money in the Social Security system to “pay grandma,” he said. “We will have to find a way to finance that.”

Either way, the country will have to pay out to solve problems with the program. Tanner advocates paying less now instead of waiting when the debt comes due and then paying more.

Merton Bernstein, an expert on Social Security and the Walter D. Coles Professor Emeritus at Washington University in St. Louis, said in November that it wouldn’t take much to ensure Social Security’s viability 75 years into the future.

He advocates for increasing the payroll tax cap to cover 90 percent of total income instead of the current 84 percent.

Increasing FICA 1 percent on both employees and employers would ensure Social Security’s ability to pay in full for the next 75 years, he said, “and that would not diminish real income because earnings are expected to exceed 1 percent a year from now into the indefinite future [once we are out of the recession].”

Most polls show people are more interested in boosting taxes than cutting benefits. “I’m a great believer in the democratic political process, but there is a disconnect [between] what people want and what Congress is seriously considering,” he said.

Tanner doesn’t believe the government will do anything in the near future to solve the Social Security crisis. He said that Republicans are afraid to touch the social program now because they got burned under George W. Bush, when potential changes to the program created a major backlash from the public.

Part of the problem is that the percentage of people in each age group that votes is equivalent to their age. “As long as that is the case, the benefits will go to the 70-year-old and the bill will go to the 30-year-old,” Tanner said. “Most young people vaguely understand that Social Security is not going to be there for them or it won’t pay them a whole lot of money,” he said.


For more related coverage on Social Security, please read:

Checking Social Security essential to financial planning

Social Security's problems not insurmountable

Poor economy drains Social Security's finances


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