Now in its 75th year of existence, Social Security is the largest single program in the federal government, consuming about 20 percent of the budget. Basically, it works like a mandatory savings account, skimming money off your paycheck and paying it back after you retire. But the program cannot fully fund its promises to seniors past the 2030s. That's why the deficit commission established by the White House will probably propose moderate changes to the program to extend its lifetime.
To understand how Social Security might change, let's review how it works. You pay a percent of every dollar you earn up to a ceiling, above which Social Security collects no taxes. Upon retirement, you receive a check that reflects your lifetime earnings. That check gets a raise every year to keep up with the prices of food and other goods.
Almost every proposal to reform Social Security targets one of those five bold words. You can raise the tax rate, now at 6.2 percent for both employers and employees. You can raise the tax ceiling, now at $106,800. You can push back the retirement age, now on track to rise to 67. You can shrink the first check. Or you can slow the pace at which that check grows every year.
When a doctor tells a patient to lose weight, he does not say, wait a few years and then fast for three months. He says walk more, eat more veggies, eat fewer sweets, try this pill. Improving the health of Social Security requires a similar approach: nothing dramatic, but many small things at once phased in over time. Let's take a closer look at our options.
Raise the Tax RateSlowly increase the payroll tax so workers and bosses pay more of their wages into the system.
Pro: Wages are rising, and the portion of wages we tax should rise as well. Raising the tax rate by a few percentage points would basically preserve Social Security for another century.
Con: A tax on work discourages work. A higher payroll rate makes employees more expensive, which could reduce employment. Indeed, one way the White House is thinking about stimulating the job market is to cancel the Social Security tax for short period.
Raise the Tax CeilingMake the tax ceiling cover 90 percent of all earnings. This would raise the taxable max about $40,000 in 2012, to $156,000.
Pro: The wages of the wealthiest Americans have grown so fast that the share of earnings taxed by Social Security has fallen from 90 percent to 83 percent in the last 30 years. Pinning the tax max to 90 percent of wages going forward would restore the status quo without increasing the burden on lower-income Americans.
Con: It's still a tax on work that will make middle-income jobs even more expensive for employers to fill. If we move even more of the tax burden on the wealthy, we're pushing Social Security away from a pension program toward a welfare program in disguise.
Raise the Retirement AgeTwo plans, here. We could raise the normal retirement age, currently at 66, which is the first year seniors can collect full benefits. Or to save more money, we could raise the early retirement age, currently at 62, which is the first year Social Security can send retirees a check.
Pro: Raising the retirement age has broad support. We are living longer, healthier lives in less labor-intensive jobs. Our retirement age should reflect that. Otherwise, we're paying 60-somethings to stop working, which is a waste of brains and tax dollars.
Con: The logic sounds airtight, but look closer. It's the richer folks who are living longer. In the last 30 years, as the retirement age has increased by eight months, men in the bottom half of earners have added only a year to their lifespans. Pushing it back further would punish the people who depend on Social Security the most.
Write smaller checks to richer people. [Want a more detailed explanation? Go here.]
Pro: Half the people who receive Social Security rely on it for more than 80 percent of their income. Meanwhile, the richest 25 percent of Americans make 80 percent of their money outside of Social Security. The easiest way to cut costs is to trim benefits, and the safest place to trim benefits is for the wealthy.
: It's a myth that we can save money by writing smaller checks for millionaires, only. To see meaningful savings, we would have to make cuts for middle-income Americans whose income depends on Social Security.
Slow the Growth of Benefits
Link Social Security cost-of-living adjustments to a slower-growing measure of inflation.
Pro: Social Security checks increase every year with prices. (When consumer prices fall, as they did last year, Social Security recipients don't get a raise.) Many experts think the consumer price index overstates the rising cost of living because it doesn't take into account the fact that we naturally adjust our spending when some goods get too expensive.
Con: Other analysts come to the opposite conclusion: the cost-of-living adjustment is too low already! Seniors demand lots of medical services, whose prices grow faster than consumer prices. Squeezing seniors' checks as they get older, and possibly sicker, is plain cruel, especially for the folks relying on Social Security for the overwhelming majority of their income.
And Four More!
Think outside the lock box. Here are haiku-length arguments for less mainstream ideas.
Immigration: If more immigrants come to the United States and work for money, their payroll taxes can pay for seniors' retirement.
Tax Reform: Overall tax reform or deficit reduction would let the government draw on regular funds to support Social Security.
Individual Accounts: Social Security adds to government's bloat, makes workers too expensive, and has a poor rate of return. Let workers save and invest in private accounts, and we'll reduce government spending overtime, boost economic growth with more private investment, and give seniors more money to tap when they retire.
Aggressively Invest the Trust Fund: We can diversify the trust fund by investing one percent a year, up to 20 percent in 20 years, in a separate fund managed by independent trustees. The trust fund would probably see higher rates of return in the long run.