Amending Social Security: how to's surface during national debt talks
Obama put Social Security on the table as part of his bid to resolve the national debt crisis. He hasn't specified what the changes might entail, and Democrats in Congress oppose any cut in benefits. But the talks signify that politicians know reforms must come, eventually, to keep Social Security solvent.
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First, the problem isn't as daunting as the challenge of rising health-care costs within Medicare and Medicaid.Skip to next paragraph
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The program has a "trust fund" built up during surplus years, which can allow it to pay beneficiaries in full until 2036, the annual report from program trustees reckons. Even after that, the program's expected payroll-tax revenue would allow it to pay reduced benefits.
But that doesn't mean changes aren't needed sooner.
"What does matter is that Social Security expenses are expected to rise by about 50 percent – from about 4.3 to 6.3 percentage points of GDP [gross domestic product] – from 2008 to 2030, and taxes aren't," finance expert Eugene Steuerle of the Urban Institute wrote in a recent analysis.
In that sense, America's long-term debt problem is partly rooted in Social Security. Demographics are the driving force. The wave of baby boomer retirements comes atop a larger trend of growing longevity. In 1950, there were 16 workers for every retiree claiming benefits. It's now three workers per retiree, and by 2030 the ratio is expected to be 2 to 1.
The Social Security trustees, one Democrat and one Republican, recommended in their recent report in mid-May that Congress make fixes in "a timely way so that necessary changes can be phased in gradually," to spread needed tax hikes or benefit reductions over more generations.
Possible solutions include:
•A simple hike in the payroll tax. Bumping the current tax of 12.4 percent on worker payrolls (paid half by employers, half by employees) to 14.6 percent would close the financing gap for 75 years. This isn't a favorite solution, but it puts the scale of the problem in perspective.
•Bump up the eligibility age. This could be done as a one-year bump up in both the early and normal retirement ages (now 62 and 67, respectively) with advance warning. Or the ages could rise gradually with estimates of longevity. Or both those approaches could be combined.
•Eliminate or raise the current earnings cap on the payroll tax, so that high-income workers pay more into Social Security.
•Reduce payouts to the best-off beneficiaries.
•Adjust the COLA system, using what proponents say is a more accurate measure of inflation.
Critics of a new COLA system say it amounts to a benefit cut and a penalty for longevity. They cite government estimates that a typical beneficiary would receive $560 less a year at age 75 than they would under the current system. By age 85 that person would get $1,000 less per year.
The debate over the ultimately inevitable reforms to Social Security is a microcosm of the larger contest over how to get the nation on sounder footing financially.
The stumbling block is that politicians, and the voters who elect them, have gotten in the habit of spending at one level and taxing at a lower level. For a good long while, they've gotten away with it, but now credit-rating agencies like Moody's are warning that the US Treasury's top-notch rating could face a downgrade.
"Economically it's actually really easy to figure out how to get our longer-term fiscal house in order," says Diane Lim Rogers, chief economist at the nonpartisan Concord Coalition, which promotes fiscal discipline. Moody's is "worried that politically there's no will," she says. Its "caution is more about the politics than the economics."