A new report by the National Center for Policy Analysis examines the different proposals that have been suggested for fixing Social Security.
Called, "How Reforms Would Affect Social Security's Funding Shortfalls, Total Spending, and Distribution of Benefits and Taxes," the report compares the implications of maintaining Social Security's current benefit schedule with three changes that would reduce spending in different ways and one that would raise revenues immediately. It examines each proposal to analyze the extent to which each would reduce the program's long-run deficits, affect spending and change the distribution of benefits and taxes.
A 2011 Social Security Trustees Report stated that the current payroll tax rate of 12.4 percentage points of taxable payroll would have to be raised 2.1 percentage points to pay current-law benefits under both the Old Age and Survivors Insurance and the Disability Insurance programs for the next 75 years. To eliminate Social Security's long-run unfunded obligations in perpetuity, without benefits reductions, a solvency tax, or immediate and permanent payroll tax hike of 3.6 percentage points would be required, the report found.
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If the current law benefits were retained, the net present value of unfunded Social Security obligations for retiree benefits is $16.1 trillion. It would require a 3.2 percent tax increase to remain solvent, the report said. The second option is Progressive Price Indexing of initial retiree benefit payments, in which the initial benefits of workers at the taxable maximum would be based on price-indexed rather than wage-indexed earnings.
According to the report, this option would reduce the long-run funding gap to $3.2 trillion and would require a modest solvency tax increase equal to 0.6 percent of taxable payroll. In terms of long-run spending, it would result in the second smallest program, about 82 percent of the size of the current program.
The third option is to change the benefit formula, which would alter the formula such that the rates at which all workers' indexed wages are replaced by benefits would decline relative to current law, with higher earning workers' replacement rates declining the most. This change would eliminate the long-run funding gap and require no additional solvency tax.
Raising the retirement age is another option being discussed. It would increase the retirement age throughout the projection period—more rapidly at first and then more gradually in each year beyond 2032. Raising the retirement age would reduce Social Security's unfunded obligations for retiree benefits to $6.3 trillion and require a 1.3 percent solvency tax.
Eliminating the taxable maximum would reduce Social Security's unfunded obligation for retiree benefits to $8.3 trillion and require a 1.3 percent payroll tax increase. Proponents of this proposal will note that it would raise revenues immediately, enhance the program's progressivity and extend the life of the Social Security Trust Fund. However, it would increase the long-run commitments of the federal government, further exacerbating the problems underlying the current fiscal crisis, the report said.
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