So, what's the problem? Social Security faces pressures both
political and demographic. Even as it's been swept up in the debt issue, the system is bracing for a wave of boomer
retirements that, combined with today's longer life spans, will exhaust the program's surplus funds over the next 25 years. At that point,
Social Security would have only enough funds from current revenue to pay out about 75 cents on every dollar of promised benefits.
THE PROCESS
Money in …
More than 80% of
Social Security's revenue comes through the
FICA (the Federal Insurance Contributions Act) payroll tax, which imposes a 12.4% tax on income, with 6.2% paid by employers and 6.2% paid by workers. Two other revenue sources: interest earned on reserve funds, and income taxes paid on benefits by higher-income retirees.
FICA revenue that isn't needed immediately is credited to the
Social Security Trust Fund and invested in securities issued by the U.S. Treasury to fund government operations. Those bonds are backed by the full faith and credit of the government. When Social Security redeems bonds, that puts pressure on the federal budget.
Money out…
A formula averages and indexes lifetime earnings to determine benefits; the average monthly retiree benefit this year is about $1,180. For 64% of Americans 65 and over, Social Security provides more than half of their income. Total benefits this year: $727 billion.
THE PROBLEM
…but it's not as bad as it looks The shortfall looks scary, but
Social Security isn't unaffordable in the context of the huge U.S. economy.
Benefits currently equal 4.84% of gross domestic product (GDP), and will rise to just 6.22% in 2035 and then decline, remaining between 5.9% and 6.0% of GDP from 2050 through 2085, according to the Social Security Administration. To close the funding gap, we'll need to raise revenue, lower costs, or do a little of both.
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.
Raise the retirement age. A gradual increase from 67 to 70 by 2040 would close 65% of the gap.
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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. >>
THE OPINIONS
Americans of all ages and political affiliations have told AARP pollsters that they want Social Security preserved in its current form, and 85% of Americans oppose cutting Social Security to reduce the deficit. But there's less agreement on exactly how to keep the program strong.
Senator Bernie Sanders (I-Vt)
"I get a little bit disturbed when I hear folks...talking about Social Security is going broke…'We have to reduce benefits, we have to privatize it, we have to raise the retirement age.' That is all total nonsense."
Syndicated columnist Mark Miller is the author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work, and Living. He blogs at RetirementRevised.com. Twitter: @RetireRevised.
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