AARP: Policy and Research Information for Professionals in Aging

Keeping Social Security Solvent

The role that Social Security plays in income security for those over age 62 remains unique. Most Americans would not have a viable retirement without it, and it will continue to be a critical source of retirement income in the future. It provides, and will continue to provide, an average of 40 percent of total retirement income and about 80 percent for retirees in the bottom 40 percent of the income distribution. Social Security plays a particularly significant role in providing retirement income security for women and minorities. More than three quarters of older women, older African Americans, and older Hispanics depend on Social Security for more than half their income.67The difference that Social Security makes in people’s lives makes strengthening the program absolutely essential.

Social Security faces no immediate crisis but a serious, though manageable, long-term financing problem. According to Social Security Administration (SSA) actuaries, even with no changes, Social Security can pay full benefits through 2041. After that date, Social Security can pay 74 percent of promised benefits.68

Social Security’s long-term solvency problem can be solved by relatively modest adjustments if we make them now (see Table 1). The system does not need a major overhaul, and AARP firmly opposes plans that create private investment accounts financed with Social Security tax revenues. Diverting funds from Social Security into private accounts does not make the system solvent; it makes the problem worse.

While ensuring Social Security’s long-term fiscal viability, we also need to preserve the elements of Social Security that are vital to the economic well-being of Americans. In addition to retirement benefits, these include insurance protection for people with disabilities, for survivors and dependents. It also includes protection against inflation, and protection against lifetime low wages (through its progressive benefit formula).

The first priority of Social Security reform must be to strengthen long-term solvency in the guaranteed, defined-benefit program. As in 1983, the path to successful reform of Social Security is likely to combine additional revenues with changes to the benefit structure in a way that maintains the integrity of the program but also ensures its long-term viability. AARP has endorsed at least three options that would advance the program toward long-term solvency. One option is to raise the maximum percentage of wages subject to the Social Security FICA tax, which now covers about 84 percent of wages, to the 90 percent level that prevailed in the early 1980s. That option alone would close the solvency gap by up to 50 percent, or 0.95 percent of payroll, depending on how quickly it is phased in. A second option is to invest a modest proportion of the Social Security accumulated reserves in equities, an approach used by a number of other countries and by many state pension funds. Such investing would allow Social Security to gain the benefit of the historically higher returns available from the stock market, while spreading the risk broadly. A third option is to include all new state and local government workers in the Social Security system, because many of them benefit from that system now without paying into it.

Equitable solvency plans need to take into account outlays as well as revenues. Benefit formula changes in particular bear consideration. Such changes may be uniquely able to restrain the growth in benefits while protecting low-income workers who are more likely to lack employer-provided pensions or significant personal savings. Pressures on Social Security created by increased longevity and the impending retirement of baby boomers also suggest the need for a balance between the number of years spent working and the number of years spent in retirement. Such a balance between work years and retirement years need not take the form of arbitrary increases in the retirement age, but could be achieved by indexing the age of full benefits to increases in life expectancy, or indexing benefits directly to longevity. To make longevity indexing a viable approach, however, there must be realistic employment opportunities for older workers, greater flexibility in work arrangements to accommodate an aging workforce, and an end to age discrimination in employment.

Changes to Social Security, if part of a comprehensive plan that encourages people to stay active in the workforce and lengthens work lives, must also recognize the continuing need for protections for those with disabilities and for those who are economically vulnerable for other reasons, whether because of discrimination or other disadvantages. Reforms should therefore include a new minimum benefit that will protect the most vulnerable against an unacceptably low level of support in retirement. For those at the bottom of the income scale, those with low lifetime earnings, or those who are long-lived and risk outliving all their other retirement assets, Social Security will remain the single most important source of retirement security and must continue to provide the protections that are not available or affordable in the private sector.