Social Security & You: Eight ideas to help keep the program funded for decades

In a recent column, I looked at the future of Social Security and noted that there are plenty of ideas for strengthening the program so it can remain solvent for generations. I also mentioned that my book, Social Security — Simple and Smart, includes a chapter on Social Security financing and eight practical reform ideas. I promised to share additional proposals, and this column does that.

These ideas come from the well-regarded Committee for a Responsible Federal Budget, a think tank whose members support public policies aimed at reducing the federal deficit and limiting government spending. Its membership includes former leaders of House and Senate budget committees, the Congressional Budget Office and the Government Accountability Office.

As I noted previously, any serious and balanced Social Security reform package would need both higher revenue and lower spending. Below are several CRFB proposals. Each one comes with a “fix percentage,” meaning the share of Social Security’s long-term financing shortfall it would address if adopted.

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On the revenue side, they suggest:

• increase the payroll tax by 1% (28% fix)

• eliminate the taxable wage base (68% fix)

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

• cover all newly hired state government workers (3% fix)

On the spending side, they suggest:

• reduce initial benefits for higher earners (34% fix)

• raise the retirement age to 69 and index for life expectancy (36% fix)

• increase years used to calculate benefits from 35 to 40 (13% fix)

• calculate cost-of-living increases with a “chained CPI” (18% fix)

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

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The current Social Security tax rate is 12.4%, split evenly between workers and employers. Increasing that rate by one percentage point, with the added cost still divided equally between employees and employers, would close nearly one-third of the program’s solvency gap.

Another major fix would come from removing the cap on earnings subject to the payroll tax. At present, that cap is $184,500, which means higher earners stop paying Social Security tax once their income reaches that level. Eliminating the cap would require them to pay taxes on all wages and would, by itself, close 68% of Social Security’s long-range funding gap.

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

About 20% of state and local government workers do not contribute to Social Security. As I have explained in past columns, there are reasons for that arrangement. This proposal would require all newly hired state and local government employees in those jurisdictions to begin paying into Social Security. The effect would be modest, improving long-term financing by about 3%.

Here is a closer look at the spending-cut proposals.

One proposal would reduce starting benefits for higher-income workers. Social Security has always been designed so that lower-income workers receive a more favorable return. In simple terms, a low-wage worker can receive a benefit equal to as much as 90% of average lifetime earnings, while most workers are closer to a 40% return. Wealthier workers may be closer to 30%. This change would lower that replacement rate for affluent retirees and would close 34% of the long-range deficit.

The current full retirement age is 67, the point at which retirees receive full benefits. This proposal would gradually raise that age in two-month steps each year until it reaches 69. After that, the age would be linked to life expectancy, rising by about one month every two years. That change alone would close about one-third of the funding gap.

The plan also calls for expanding the earnings history used to calculate benefits from 35 years to 40. Because Social Security benefits are based on a worker’s average earnings, adding five more years would likely bring more lower-earning years into the calculation, reducing the average and lowering benefits. This would cut the long-term deficit by 13%.

Finally, although many seniors oppose it, most economists believe the current method for calculating annual cost-of-living increases is too generous. A chained CPI formula is generally considered a more accurate measure of inflation. It would reduce yearly COLAs by about 1%, but that reduction would close roughly one-fifth of Social Security’s financing gap.

In this column, I have offered a brief overview of several Social Security reform ideas from the Committee for a Responsible Federal Budget. For more information, visit its website at www.crfb.org.