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It's Time to Protect Social Security

The longer we wait, the harder it gets. Here are possible solutions from both sides of the political aisle

by: Mark Miller | from: AARP The Magazine | Sept./Oct. 2011 issue

The Social Security Playbook illustration

Changes are needed to restore Social Security to long-term fiscal health. — Illustration by Pete Ryan

THE OPTIONS

There must be 50 ways to fix Social Security, or at least a dozen. But most potential solutions fall into two main categories: Raise more money, or adjust benefits.

Option 1: Raise revenue

Raise the cap on income subject to FICA taxes, now set at $106,800. Lifting the cap to cover $190,000 of income closes 31% of the gap, according to an AARP analysis; complete removal closes 99% of the shortfall.

Raise the payroll-tax rate on employers and employees. An increase to 6.7% from the current 6.2% eliminates half the shortfall.

Broaden the base of income subject to FICA taxes, such as tax-excluded health benefits and flexible-spending accounts. This closes 11% of the gap.

Option 2: Adjust benefits

Raise the retirement age. A gradual increase from 67 to 70 by 2040 would close 65% of the gap.

Index benefits for longevity by paying lower annual benefits as average life expectancy increases. This closes 21% of the gap and maintains similar total lifetime benefits for each generation. (But lower-income Americans, who have shorter life expectancies, would receive a bigger benefit cut.)

Change the formula for the annual cost-of-living adjustment (COLA). President Obama's deficit commission recommended using a new inflation measure called the "chained" Consumer Price Index, which tends to rise more slowly than the index now used to compute Social Security's COLA.

Option 3: Private accounts

President George W. Bush's proposal in 2005 to partially privatize Social Security by creating IRA-style retirement accounts was defeated, but a small contingent of policymakers and politicians continues to argue for partial privatization or even elimination of Social Security altogether.

Next: Social Security opinions: Everybody's got one. >>