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How to fix Social Security

By Jennie L. Phipps · Bankrate.com
Monday, February 7, 2011
Posted: 4 pm ET

Here's a little retirement planning exercise. See if you agree.

If you ruled the world and you could fix Social Security, how would you do it?

The University of Maryland Program for Public Consultation asked that question of about 2,000 people and found that given a series of possibilities and the percentage of the problem each would fix, 75 percent were willing to make choices that eliminated the shortfall.

About 60 percent of respondents were able to make enough changes to Social Security to put it on solid footing and at the same time, raise benefits to low-income retirees.

Here are the choices that people made:

  • Raising payroll tax limit to $156,000 solves 25 percent of the problem and 83 percent found it tolerable.
  • Completely eliminating the payroll tax limit solves 75 percent of the problem and 78 percent found it tolerable.
  • Calculating starting benefits based on the inflation rate of prices not wages solves 25 percent of the problem and 79 percent found this tolerable.
  • Adjusting cost of living increases to buying patterns most relevant to older Americans solves 25 percent of the problem and 75 percent found it tolerable.
  • Raising the retirement age to 68 by 2034 solves 13 percent of the problem and 65 percent found it tolerable.
  • Raising the retirement age to 70 by 2048 solves 38 percent and 41 percent found it tolerable.
  • Increasing the Social Security tax 1 percent over 20 years solves 75 percent of the problem and 85 percent found it tolerable.
  • Reducing benefits by 25 percent overall solves 50 percent of the problem and 19 percent found it tolerable.

If we can agree to this extent on making these hard choices, why can't our elected representatives do the same thing?

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26 Comments
mike
March 09, 2011 at 12:38 pm

why doesnt the government fix social security? simple, because they dont want to! how many i o u s, is there in the social security coffers a bunch!!! the only way social security will survive, is to take out of general fund and make it a self sustaining fund. then remove cap. raise social security contrbutions 2-3 %. leave age alone, it will create unemployment because people will have to work longer, if you raise it. people that have not put money in social security, should not receive any money from it. if you want to really put a cure in for social security woes, put a 10 cent a gallon gasoline tax on gas to make it solvent, when its solvent, remove the tax. the government is only going to put a bandaid on a severed artery!!! do u realy think they want to cure it!! im 58 years old, i dont really think they have any intention!!

philip meguire
March 09, 2011 at 2:30 am

Everybody, please understand that the US Supreme Court ruled, in a landmark 1960 decision, that SS is not a contract between the American people and the Federal government. Congress may alter SS taxes and benefits at any time, and citizens like us have no standing to seek redress in Federal court. What Congress giveth, it can take away at any time.

Here's my preferred method for making SS solvent again:

* SS benefits should be fully taxable like any private pension. This is a commonsensical way of partially means testing SS;

* Benefits should increase at the lower of the CPI or of the average increase in clerical and manual pay. The BLS calculates both of these numbers;

* The ceiling on the FICA tax should be more or less doubled.

* I am for keeping the option to retire at any time between the 62nd and 70th birthdays, as at present. However, I am not confident that the amount by which monthly benefits are decreased if one retires early, is actuarily fair. In other words, the present value of benefits, adjusted for life expectancy, should be the same regardless of what age one chooses to retire. I would accept a greater reduction of the monthly benefit for those who retire "early."

My calculations suggest that I am better off retiring at 62, unless I live longer than 82-84. White middle class women typically live that long, but we men often usually do not.

Here's why I have lost interest in talk of privatising SS. Let a married couple invest in an IRA as follows: 23-34, 5K/year; 35-49, 10K/year; 40-67, 12K/year. This couple will accumulate about 800K by age 67, assuming a real annual return of 3% (typical of investment grade bonds) and 1.7M, assuming a real annual return of 6%, typical of stocks over the long haul. That's enough to fund a very decent retirement even without SS benefits.

To all those who resist defined contribution retirement plans, my advice is very simple: invest your IRA or 401k in a bond market index fund that invests in bonds rated AA or better. I promise you that your sleep will be seldom disturbed. SS is an annuitised liability of the US Treasury. I would prefer to invest in T-Bonds, and to handle the annuitisation myself.

BTW, for everyday people, the best savings vehicle under current tax law is to buy index mutual funds out of after-tax income, reinvest the tax-free dividends and capital gains distributions, and draw tax-free money out in old age. We cannot assume that this tax treatment will persist, however. Roth also dominates traditional IRAs, as long as your marginal tax rate during your working years is no more than 15%.

Vastly more controversial would be reducing the amount paid to women because they have much longer old ages than men do. One out of 4 white women makes it to her 90th birthday. My mother is 86.

philip meguire
March 08, 2011 at 4:45 pm

Everybody, please understand that the US Supreme Court ruled, in a landmark 1960 decision, that SS is not a contract between the American people and the Federal government. Congress may alter SS taxes and benefits at any time, and citizens like us have no standing to sue the Federal govt. What Congress giveth, it can take away at any time.

Here's my preferred method for making SS solvent again:

* SS benefits should be fully taxable like any private pension. This is a common sensical way of means testing SS;

* Benefits should increase at the lower of the CPI or of the average increase in clerical and manual pay. The BLS calculates both of these numbers;

* The ceiling on the FICA tax should be more or less doubled.

* I am for keeping the option to retire at any time between the 62nd and 70th birthdays, as at present. However, I am not confident that the amount by which monthly benefits are decreased if one retires early, is actuarily fair. In other words, the present value of benefits, adjusted for life expectancy, should be the same regardless of what age one chooses to retire. I would accept a greater reduction of the monthly benefit for those who retire "early." My calculations suggest that I am better off retiring at 62, unless I live longer than 82-84. White middle class women typically live that long, but we men often usually do not.

Here's why I have lost interest in talk of privatising SS. At present, if a married couple make full use of IRAs over their working lifetimes, including saving 12K/year when they become empty nesters, they will accumulate about 800K by age 67, assuming a real annual return of 3% (typical of investment grade bonds) and 1.6M, assuming a real annual return of 6%, typical of stocks over the long haul. That's enough to fund a very decent retirement even without SS benefits.

To all those who resist defined contribution retirement plans, my advice is very simple: invest your IRA or 401k in a bond market index fund that invests in bonds rated AA or better. I promise you that your sleep will be seldom disturbed. SS is an annuitised liability of the US Treasury. I would prefer to hold invest in T-Bonds, and to handle the annuitisation myself.

BTW, for everyday people, the best savings vehicle under current tax law is to buy index mutual funds out of after-tax income, reinvest the tax-free dividends and capital gains distributions, and draw tax-free money out in old age. We cannot assume that this tax treatment will persist, however. Roth also dominates traditional IRAs, as long as your marginal tax rate is no more than 15%.

Vastly more controversial would be reducing the amount paid to women because they have much longer old ages than men do. One out of 4 white women makes it to her 90th birthday. My mother is 86.

Foo
March 04, 2011 at 1:52 pm

John Colter is nuts in that is proposal is financially infeasible and delusional. Pretty much zero of the current budget deficit (or national debt) is caused by SS or Medicare. Heck the government owes those programs trillions of dollars.

But lets ignore that. Lets focus on how unfair it would be to just get back what you put in (30 years of compounding is a lot), where those trillions of dollars would come from, and where the money for current beneficiaries will come from.

As far as raising the limits and reducing benefits, you have to decide if SS is a pension type program or is it welfare. If you switch it from a pension style program to a welfare one you risk eroding its support.

Personally I would like to know what if SS just invested its money in decent financial instruments (i.e. if you have a 20-30 year time horizon, would you stick all your money in treasuries ?) would this whole problem go away? Of course then the debts for the past 20 years would have looked a lot larger.

gloria defilippi
March 01, 2011 at 5:09 pm

make federal employees including congressman and senators pay into one system with the rest of the country. that includes Health Care too!!! I bet things would be solved real quick. I'M sick of paying taxes on my soc. sec.and now my pension which is $600.00 a month after 43 years of nursing.NO, i don't have health care either.

Joe
February 23, 2011 at 9:15 am

As I read the bullet points (8)listed above I find it curious that all 8 include raising taxes and reducing benefits. Clearly the 2,000 people used in the survey were either young, inside a union hall, a class room or a government agency. None of which have a clue about SS

The fact that not one solution involved a form of privatization proves this, the fact that not one solution was something other than the democratic line of saving SS proves that.

Here's one basic repair to most problems. "Motivate" As we sit on the brink of a new flood of retirees the babyboomers, and that currently SS pays out more that it takes in in revenue/taxes one thing we need to do is motivate the boomers not to retire as early as possible rather than mandate it by tax and age adjustment.

for example successful people could defer taking SS income until any age they wanted and keep working but at the same time reserve the taxes they pay into SS into there ow account. Successful people would continue working to a much older age.

What the morons in the survey and the subsequent bloggers who commented don't know is that each year successful people in their 50's pay in an excess of $11,000 of taxes and receive Zero benefit for these taxes. All this does is motivate successful people to retire as early as possible. If we make structural changes and encourage millions of 50 plus people not to retire early the problem largely corrects itself and voluntarily.

Finally at the age of 54 today I am aware that since the 1950's conservatives have been warning of the problems in SS but liberals have all and always refused to make any changes except to increase taxes and further exempt themselves from them.

James T.Crall
February 21, 2011 at 9:27 pm

If people paid social security tax until their income reached 150,000 the program would be fixed for at least seventy years.Polititians may not want it done this way simply because it is two easy.Polititians do things the hard way, and that is why the country is in such a mess--thanks mostly to the republician party.They fought against social security from it's begining,and they fought against medicare from the start.But they are allways ready to jump into a war and give big tax breaks to the supper rich.Republicians are a mean, and angry bunch,that has done much harm to America.

john colter
February 21, 2011 at 7:16 pm

None of your solutions will work because it is a failed system. The fix is simple and fair. Only those on the system currently that are legitimate payees into the ss system should continue to get benefits. All others are dropped permanently. Then all who are not yet on the payout would get all of the money back they had to put in. The whole thing dies with the last legitimate reciever and we then have a balanced budget and no longer a henious social experiment that has about destroyed the country. The people could then invest for themselves in whatever plan they like, as long as it isn't government run!

Robert
February 18, 2011 at 8:28 pm

It's very understandable that the comment's of ssi does'nt apply to the younger generration, They think that they know better, They are so much more educated, There parents paid for there educaction and they do not know what it means to go out and earn a living, They also do not know how to live with out computers or even to or have any idea or what the costution of the US is about. I may not how to spell, But I believe you should re-read you're history and read IT.

Jon Cave
February 18, 2011 at 2:52 pm

First and foremost require the federal government to pay all of the funds taken from social security back over the next 10 years. END OF DISCUSSION.>