MAKING SOCIAL SECURITY SUSTAINABLE
November 09, 2010
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Social Security is an important program that is part of the fabric of America. We must ensure that Social Security is available for future generations. Without reform, Social Security’s shortfall will grow larger and larger until the program may simply be unable to pay full benefits to future retirees. Reforms can also be implemented in ways that protect the most vulnerable.

As the largest single program in the federal government, Social Security currently provides retirement, disability, and survivors benefits to approximately 53 million Americans. Social Security was established in 1935 and collects money from today’s workers, and uses it to pay benefits to current retirees. The program’s expenditures in 2009 totaled $686 billion. A recent report estimates that in 2008, the Social Security program kept almost 20 million Americans from living in poverty. 

However, the program now faces challenges because people are living much longer (receiving more benefits over more years) and the elderly population is increasing due to the aging of the “baby boom” generation.  In 1950, there were more than 16 workers paying taxes to support 1 retired person; by 2040, there will only be 2 workers for each retired person. This creates a big shortfall of money in the system.

Since certain reforms enacted in 1983, the Social Security system has generated more revenue (from the payroll tax and the taxation of benefits) each year than it has paid out in benefits. This money was spent on other programs, and, in return, the Social Security Trust Fund received special notes from the Treasury. According to the Social Security Trustees, the Trust Fund currently holds $2.5 trillion in these notes. In 2015, Social Security will begin to operate with a permanent cash flow deficit. This means that the cost of providing benefits will exceed the amount of revenue flowing into the system. The Social Security program will begin redeeming the notes held in the Trust Fund. The Trust Fund will be exhausted in 2037, according to the Social Security Actuary.  After that point, unless reforms are made, Social Security will only be able to pay about 78 percent of currently scheduled benefits.

Future solvency of Social Security can be achieved through a change in the benefits of the program, a change in its revenues, or a combination of the two. By acting sooner rather than later, needed reforms can be phased in more gradually, giving people time to plan for their retirement years.  Current beneficiaries and workers nearing retirement would not be affected.

 

2 Van de Water, Paul, and Arloc Sherman. “Social Security Keeps 20 Million Americans Out of Poverty: A State-By-State Analysis.” CBPP. August 11, 2010.


Policy Options:

Gradually raise the full retirement age

Under current law, the earliest age at which a person can claim Social Security retirement benefits is 62. If a worker begins collecting benefits at this age, his or her monthly benefit is reduced so each individual can expect to receive the same amount of benefits as he or she would at the full retirement age. (The full retirement age is the age at which a person can claim the full Social Security retirement benefit.) The current full retirement age is 66 and will gradually rise to 67 for people born after 1959.  One option to extend solvency of the Social Security system would involve raising the full retirement age beyond 67.  There are a number of available options to do this, including raising the full retirement age to 68 or 70, or indexing the full retirement age to increases in life expectancy.    

Increase the amount of revenue raised from workers

Social Security is primarily financed through a payroll tax of 12.4 percent. Employees pay half of the tax, and employers pay the other half. (The self-employed pay the entire 12.4 percent.)  Under current law, the payroll tax only applies to a portion of earnings up to a “taxable maximum.” In 2010, the first $106,800 of earnings is subject to the payroll tax. This results in higher-income earners facing a smaller payroll tax burden because all of their earnings above the taxable maximum are exempt from the tax. 

There are many approaches to increasing the total amount of revenue collected for the Social Security program. Some options include: raising the payroll tax from its current 12.4 percent (for example, increasing the payroll tax rate by 1 percentage point in 2012, 2 percentage points over the next 20 years, or 3 percentage points over the next 60 years), or increasing the taxable maximum beyond its current level.      

 

 

3 Under current law the full retirement age is increasing 2 months per birth year. http://www.socialsecurity.gov/pubs/retirechart.htm

 

 

Adjust benefits

Under current law, the initial benefit a new retiree receives from Social Security reflects the amount of actual wages earned as well as the growth in average wages in the U.S. during his or her work life. This is called “wage indexing.” Upon retirement, a worker’s annual earnings over a 35-year period are averaged, and then adjusted to reflect the increase in average wages in the U.S. over that period. The benefits Social Security beneficiaries receive are then adjusted annually to reflect increase in cost of living.

A number of proposals to improve Social Security’s finances would slow the growth in benefits.   Some frequently mentioned options include:  slowing the automatic growth in benefits for the well-off or for everybody; keeping the current system for low-income workers, but indexing initial benefits to growth in prices for the higher-income workers (also known as “progressive price indexing”); or changing the cost of living adjustment (COLA) to more accurately reflect consumer behavior.

Encourage saving for retirement:

Americans are saving much less than they used to for retirement. A recent report estimates that the age group facing the largest retirement shortfall are the Generation Xers born between 1965 and 1974.    The size of the average shortfall is over $47,000. This means that workers currently preparing for retirement need to save an additional $47,000 over their working lives to meet their expenses in retirement and maintain their standard of living. One option to encourage savings is to implement an “add-on” private retirement savings account, to which workers would contribute, for example, an additional 2 percent of their pre-tax earnings. The account would be similar to the Federal Thrift Savings Plan (currently used by federal employees and members of Congress), and offer participants a manageable choice of investments.


4 Employee Benefit Research Institute. “Retirement Savings Shortfalls for Today’s Workers.” October, 2010.

Learn More:
PGPF SPENDING PRIMER

Social Security Policy Options, Congressional Budget Office
Saving Social Security: The Diamond-Orszag Plan, Brookings Institute
What Every American Needs to Know About Government-Entitlement Reform, American Enterprise Institute
The Cato Handbook for Policy Makers 2009, Chapter 17, The Cato Institute
Representative Paul Ryan. A Roadmap for America’s Future
Let’s Get Specific: Social Security,” Committee for a Responsible Federal Budget.

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