The Senate Committee on Finance held a hearing this week to examine the impact Social Security has on the federal budget. The Social Security trust fund is currently projected to hold enough resources to pay out benefits until the end of 2037. After that, unless changes are made to the program, there will only be enough money to pay out about three quarters of scheduled benefits.
Some presenters argued that we need to make changes quickly to sure up the program. “If we act today we needn’t necessarily raise taxes on workers, nor must we compel future retirees to accept a standard of living in retirement that is lower than for today’s retirees,” says Charles Blahous, a research fellow at the Hoover Institution in Washington, D.C. Other invited speakers suggested that only minor tweaks are necessary to insure the long-term solvency of the popular entitlement. “The critics of our Social Security program tell us to fear that Social Security is not working, to fear that it is bankrupting the country, and to fear that it cannot be counted on in the future,” says James Roosevelt Jr., President Roosevelt’s grandson and president and chief executive officer of the Tufts Health Plan in Watertown, Mass. “The truth about Social Security is that it is solvent today because it has a dedicated income stream that covers its costs and is actuarially sound and, more importantly, with minor adjustment it will remain solvent for decades to come.”
Invited speakers also advocated for a variety of changes to the entitlement program. Here’s a look at six potential changes to Social Security discussed at the Senate hearing.
Raise the tax cap. Workers pay into the Social Security trust fund on earnings up to $106,800 in 2011. “If we eliminated the cap, even if we counted all the increased earnings toward benefits, we would eliminate an estimated 95 percent of the shortfall,” says Roosevelt. “And this change would impact only the top 6 percent of wage earners in this country.”
Increase contribution rates. If all workers paid slightly more into the trust fund, it would also eliminate Social Security’s projected deficit. “Increasing employee and employer contribution rates by 1.1 percent—from the current 6.2 percent to 7.3 percent—would eliminate the entire projected shortfall and provide 100 percent of benefits after the year 2037 through 2085,” says Roosevelt. Nancy Altman, chair of the Pension Rights Center and co-chair of the Strengthen Social Security Campaign in Washington, D.C., agrees. “What most Americans support—eliminating Social Security’s manageable shortfall solely through increased revenue—is the best policy solution,” she says.
Modify the benefit formula. Social Security replaces a larger proportion of pre-retirement income for low income workers than for employees who earn more. Benefit payouts replace 90 percent of the first $9,000 in average annual wages, 32 percent of the next $55,000 in average annual wages, and 15 percent of average annual wages from $64,000 to $107,000. These bend points increase annually to keep up with wage growth. “Modification could be achieved through a variety of reforms, including reducing the benefit formula’s second and third rate, indexing the second and third bend points to inflation instead of wage growth (commonly known as progressive price indexing), or establishing a fourth bend point that reduces benefits for workers with high lifetime average incomes,” says Alex Brill, a research fellow for the American Enterprise Institute in Washington, D.C. The objective of these changes is to slow future benefit growth.
Raise the retirement age. The Social Security eligibility age for unreduced retirement benefits is currently between ages 65 and 67, depending on the year you were born. Benefits can be claimed as early as age 62, but payouts are reduced for early claiming. Brill suggests indexing the retirement age to increases in longevity. “This policy, which includes a hardship exemption for workers physically unable to work beyond the early eligibility age, eliminates almost one-third of the 75th-year financing gap,” he says. “Raising the early eligibility age from 62 to 65, while only having a modest impact on the trust fund insolvency date by pushing it back about five years, would promote labor market participation and, as estimated by my colleague Andrew Biggs, would increase GDP by about 5 percent.” Increasing the retirement age would result in lower benefits for most workers. “A 1 year increase in the retirement age is roughly equal to a 7 percent reduction in benefits,” says Max Baucus, chairman of the Senate Finance Committee.
Reduce inflation adjustments. Social Security benefits are adjusted each year to keep up with inflation, as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers. However, an alternative measure of inflation, such as the chain-weighted consumer price index, could be used instead to calculate annual cost-of-living adjustments (COLA). “This change would, on average, reduce the COLA in most years, which would eliminate about one-sixth of the financing gap in the 75th year,” says Brill.
Include more workers. The majority of American workers already pay into the Social Security system, but there are a few significant groups of people who don’t, such as some state and municipal government employees. “In my home state of Massachusetts, for instance, almost 95 percent of state and local government workers do not pay into Social Security,” says Roosevelt. “If we extended Social Security to all newly-hired state and local employees over the next five years, the Special Committee on Aging estimates we would eliminate almost 10 percent of the projected deficit, while also eliminating another burden on state and local governments.”