Additional Ideas for Social Security Reform

In a recent column, I talked about the future of Social Security and noted that there are plenty of reform ideas that could keep the program solvent for generations. I mentioned that my book, Social Security — Simple and Smart, includes a chapter on Social Security financing along with eight practical reform ideas, and I promised to share more suggestions later. Here they are.

These proposals come from the Committee for a Responsible Federal Budget, a well-regarded think tank whose members support policies aimed at reducing the federal deficit and restraining government spending. Among its members are former leaders of House and Senate budget committees, the Congressional Budget Office, and the Government Accountability Office.

As I noted earlier, any serious and balanced Social Security rescue package would need both higher revenue and lower spending. The Committee for a Responsible Federal Budget offers several options, each with a stated “fix percentage,” meaning the share of Social Security’s long-term funding problem that would be solved if that proposal were adopted.

Revenue-side proposals include:

— Raise the payroll tax by 1% (28% fix)

— Remove the taxable wage cap (68% fix)

— Make cafeteria plans subject to the payroll tax (10% fix)

— Cover all newly hired state government workers (3% fix)

Spending-side proposals include:

— Reduce starting benefits for higher earners (34% fix)

— Raise the retirement age to 69 and then index it to life expectancy (36% fix)

— Increase the number of years used to calculate benefits from 35 to 40 (13% fix)

— Use a “chained CPI” to determine cost-of-living increases (18% fix)

Here is a closer look at the revenue-raising ideas.

The current Social Security payroll tax rate is 12.4%, split evenly between workers and employers. Increasing that rate by one percentage point, also split evenly, would close nearly one-third of Social Security’s solvency gap.

An even larger improvement would come from eliminating the income cap subject to payroll taxes. Right now, the cap is $184,500, which means higher earners stop paying Social Security taxes once their income reaches that level. Under this proposal, taxes would apply to all earnings, and that alone would close 68% of the program’s long-range funding shortfall.

“Cafeteria plans” allow employers to provide fringe benefits on a pre-tax basis. Removing the tax advantage for those plans would move Social Security about 10% closer to long-term solvency.

Roughly 20% of state and local government employees do not contribute to Social Security. This proposal would require all newly hired state and local workers in those jurisdictions to begin paying into the system. The effect on long-range finances would be relatively small, boosting revenues by about 3%.

Here is a closer look at the benefit-cutting ideas.

One proposal would reduce initial benefits for higher-income workers. Social Security has always been designed to provide a better return to lower-paid workers. In simple terms, a lower-wage worker may receive a benefit equal to as much as 90% of average lifetime earnings, while most workers fall closer to a 40% return. For high earners, the replacement rate may be nearer 30%. Under this proposal, that rate for wealthier retirees would be lowered, trimming their benefits slightly and closing 34% of the long-term deficit.

The current full retirement age is 67, the point at which a retiree qualifies for full benefits. This proposal would raise that age in two-month increments each year until it reaches 69, and then adjust it further based on life expectancy, increasing it by about one month every two years. That change alone would close about one-third of Social Security’s funding gap.

Another recommendation would increase the earnings history used in benefit calculations from 35 years to 40 years. Since Social Security benefits are based on average earnings, adding five more years would likely bring lower-earning years into the formula, lowering the average and therefore reducing future benefits. This would cut the long-range deficit by 13%.

Finally, many economists believe the current method for calculating annual cost-of-living increases is too generous. The “chained” formula is intended to measure inflation more accurately. It would reduce yearly COLAs by about 1%, but that smaller increase would close roughly one-fifth of Social Security’s funding gap.

In this column, I have offered only a brief overview of several Social Security reform ideas from the Committee for a Responsible Federal Budget. Readers who want more information can visit the group’s website at www.crfb.org.

If you have questions about Social Security, Tom Margenau has two books that answer many of them. One is Social Security — Simple and Smart: 10 Easy-to-Understand Fact Sheets That Will Answer All Your Questions About Social Security. The other is Social Security: 100 Myths and 100 Facts. Both are available at Amazon.com and other booksellers. You can also email him at [email protected]. To learn more about Tom Margenau, read past columns, and see work from other Creators Syndicate writers and cartoonists, visit www.creators.com.