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Strengthening Social Security:
Options: Where can we go from here?
To balance the Social Security books, the simplest options are: raise the payroll tax; cut benefits; extend the qualifying age. Other options are gaining momentum while President George W. Bush calls for a restructured system characterized by private accounts. Lawmakers will likely negotiate some combination of these options.
1. Raise the Social Security payroll tax
Currently at 12.4 percent, Social Security Trustees project that the shortfall could be covered by an immediate surcharge of less than two percentage points, less if combined with benefit cuts. Others, who point to more of a crisis, such as the Cato Institute or Kentucky Representative Anne Northup, estimate that to balance the current system over the next 75 years would require an immediate tax increase of 15 percent or a benefit cut of 13 percent. Proponents of this option face an uphill battle in that President Bush has made it clear that a Social Security payroll tax increase for anyone 55 years or older is not to be included in any plan he would endorse.
| Those who favor this option may say... | Those who oppose this option may say... |
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The system does not need an overhaul. A modest tax increase is the most responsible way to offset demands on the system due to changing demographics. It is better for this generation to absorb a slight tax increase than to pass on the burden of debt to future generations. The Social Security Trustees project that if taxes are raised by approximately one percent for employer and employee (to 7.2 percent each), the program would be solvent through 2077. |
Citizens are already overtaxed. Government should take steps to allow citizens to keep more of their own money to save or invest as they please. The burden of this tax increase would fall most heavily on lower and middle-income workers and on future generations. |
2. Cut Social Security benefits
If the more pessimistic projections are accurate – that benefit cuts of 13 percent would be required to close the Social Security shortfall – this option alone may be a difficult one politically, given the strength of the senior (AARP) lobby. The average annual benefit of $14,000 would dip to $12,180. Some officials recommend switching to an inflation index rather than the current wage index for incremental benefit increases. Many feel there is a need to blend benefit adjustments with tax increases and other options. President Bush does not support tampering with benefits of anyone 55 years or older.
| Those who favor this option may say... | Those who oppose this option may say... |
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Through the years, Social Security payments have automatically raised with inflation; wages have not. Tax policies favor older Americans and many affluent Americans receive Social Security. In 1996, $15 billion in Social Security benefits went annually to households with retirement incomes of more than $100,000. Our government is paying a lot of older people to stop working and enjoy themselves
Long ago, we should have begun gradually raising eligibility ages and trimming benefits for wealthier retirees. Younger and relatively poorer taxpayers are supporting older and wealthier retirees. |
Many seniors, particularly those who rely solely on Social Security income, would suffer with benefit cuts. Twenty percent of recipients rely solely on Social Security, and nearly half of them live in poverty. Further cuts would be catastrophic. |
3. Extend the qualifying age
Things have changed since 1935. People are living longer. Consequently, seniors should not qualify for Social Security benefits until later in life. This would reduce the overall program costs significantly. Currently, seniors can take early retirement at 62, and the qualifying age has been phased in from 65 to 67.
| Those who favor this option may say... | Those who oppose this option may say... |
|---|---|
When Social Security guidelines were established, the life expectancy was nearly two decades less than it is today. Advances in health care, medications, prevention, and fitness are helping seniors live longer, more productive lives. We should encourage seniors to work. Many can make meaningful contributions through work well beyond the current retirement threshold. |
Seniors should be rewarded for a lifetime of work and savings. They should have an opportunity to enjoy their retirement years. It would not be fair for the next generation of seniors to enjoy fewer benefits than the current generation. |
4. INCREASE THE WAGE LEVEL SUBJECT TO SOCIAL SECURITY PAYROLL TAX
Increasing the wage cap that is subject to Social Security payroll taxes from $90,000 to $200,000 would raise nearly $1 trillion over a decade. Someone at that wage level would pay $6,820 more per year in Social Security payroll taxes, and the employer would be required to match it. Six percent of American workers earn more than $90,000 per year. In 2005, $845 billion in payroll will not be taxed by Social Security. AARP recommends raising the cap from $90,000 in 2005 to $140,000, phased in over decade. They project that this step would lower the shortfall by 43%.
5. INCREASE THE RETURN ON SOCIAL SECURITY
Rather than limit Social Security Trust Funds to investments in U.S. Treasuries, diversify into conservative stocks and mutual funds for a higher return. This could close the projected shortfall and eliminate the need to raise taxes or reduce benefits. AARP projects that this step would solve 15 percent of the problem.
6. MAKE RETIREMENT PLANNING MANDATORY
Former U.S. Treasury Secretary Paul O’Neill promotes a process that will produce at least a $1 million annuity for every American at retirement age. He suggests shifting the 12.4 percent Social Security tax into a mandatory savings account that would begin when citizens enter the workforce.
7. CONVERT THE SOCIAL SECURITY SYSTEM TO A VOLUNTARY ONE
If Social Security were converted to a voluntary system, many would opt out and retain funds that otherwise are extracted for Social Security taxes. They would have 6.2 percent more discretionary funds to save and invest. Over time, compound interest would produce a larger retirement fund than the current system, and at the same time, reduce the size and cost of the Social Security program.
8. BRING MORE WORKERS INTO THE SYSTEM
Approximately seven million local and state employees are not covered by Social Security. Bringing them into the system would strengthen it.