Retirement Blog

Finance Blogs » Retirement » How would you fix Social Security?

How would you fix Social Security?

By Jennie L. Phipps · Bankrate.com
Wednesday, November 9, 2011
Posted: 5 pm ET

While the congressional supercommittee fights over ways to cut the deficit, the elephant in the room is Social Security, which is 21 percent of the federal budget, but it's a key part of almost everyone's retirement planning.

Using Social Security's own actuarial numbers, the National Center for Policy Analysis, a free market-leaning nonprofit, analyzed four proposals to modify how Social Security taxes and spends, calculating the impact of each proposal on single males ages 26 and 46 who will be living in retirement until they are 95.

The goal of each of these proposals is to make Social Security solvent for the long haul. Of course, we don't know what the long haul will bring, but these actuaries calculated the numbers to the infinite horizon.

Here are the four proposals. You can see their impacts in the charts below:

Progressive price indexing. Social Security already pays lower earners a larger percentage of their incomes. Under this proposal, low earners would continue to receive benefits calculated they way they are now. But high earners would have their benefits calculated differently, using a formula that that would base benefits on "price indexing" -- the cost of goods and services.  For average workers, benefits would be calculated by using a mix of wage indexing and price indexing, which reduces benefits more than they would be reduced for low earners but less than for high earners. The changes would be instituted over time.

Changing how benefits are calculated. This proposal would use factors that reduce income replacement rates as average wages rise. As a result, everybody's Social Security would be cut compared to the way it is calculated now, but lower earners would be affected less than people in the middle. Higher earners would see the largest cuts.

Raise the retirement age. This proposal increases full retirement age one month every two years until it reaches age 70 for those born in 1960. This would have a punishing effect on lifetime benefits for workers with lower life expectancies. Social Security's actuaries currently calculate that the life expectancy at age 65 for very high earning men is almost 20 percent higher than for those with medium earnings, while the life expectancy for very low earners is about 7 percent lower than for medium earners.

Eliminating the taxable maximum income. This proposal increases revenues immediately. That makes it a likely choice for deficit cutters. Some proposals ignore the additional taxes paid on earnings above the maximum for purposes of calculating benefits. That makes this a pure tax on high earners, so that version of the proposal isn't likely to be adopted. The proposal  analyzed in the chart below credits all earnings to workers in the calculation of their benefits. That enlarges the size of the Social Security program, while the rest of these proposals shrink it. In the short run, it produces a surplus, but in the long run, it increases the annual funding gap. By 2085, the gap is 2.5 percent of taxable payroll.

If we just leave Social Security alone, paying out just like it is now, but increase payroll taxes immediately by a total of 3.6 percent -- levying half on workers and half on employers -- these actuaries calculate the program would remain solvent indefinitely.

Pick your poison:

The cost of cutting Social Security
Change in lifetime taxes and benefits for average income single male, age 41 (in 2011 dollars)
Reform Lifetime taxes Lifetime benefits Gain/loss
Progressive price indexing -$50,793 -$20,522 $30,271
Change the benefit formula -$63,709 -$59,123 $4,586
Raise the retirement age -$38,687 -$59,047 $20,360
Eliminate the taxable maximum -$37,458 $0 $37,458
Change in lifetime taxes and benefits for average income single male, age 26 (in 2011 dollars)
Reform Lifetime taxes Lifetime benefits Gain/loss
Progressive price indexing -$106,288 -$52,406 $53,882
Change the benefit formula -$133,316 -$135,260 -$1,944
Raise the retirement age -$80,957 -$85,284 -$4,327
Eliminate the taxable maximum -$78,384 $0 $78,384
«
»
Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.
10 Comments
Deanna
January 07, 2012 at 8:03 pm

Make social security voluntary. I see no reason for me to pay for my entire working life and only get a small percentage when I retire. Please government don’t “help” me-I can do better by myself!

max welty
December 06, 2011 at 9:59 pm

take all of george w bush's money and put it in the ss program to make up for wrongly taking money that was ss money to "fight his wars" and cutting taxws of his rich friends and then letting the middle class pay for all of in the end.

molly
November 12, 2011 at 3:41 am

Dump all marriage-based benefits. They represent wealth redistribution from modestly compensated hard workers to affluent couples who can afford to keep one spouse at home for most of his or her adult life.

bytejockey
November 10, 2011 at 1:15 pm

The only fix for involuntary servitude is to end it.

Charlie H
November 10, 2011 at 12:13 pm

Change from defined benifit to minimium benifit of X1 poverty line + defined contribution.

John Q Taxpayer
November 10, 2011 at 11:10 am

Step 1: Eliminate Social Security
Step 2: ???
Step 3: Profit!

Ben
November 10, 2011 at 8:55 am

I'm with Ted, let me off your rollercoaster. You can even have what I've already paid in for the last 20 years. Consider it a gift.

Ted
November 10, 2011 at 8:28 am

Do whatever you want with the program--just let me opt out.

J.Ron Moore
November 10, 2011 at 7:45 am

Stop useing SS as a dumping ground for people who havent paid a thin dime into the program.Congress has used SS for years as a bailout for their failed programs,people like me who have paid into SS for their entire working life want their money back and since congress has "bowered the money" we want intrest.

Darlene
November 09, 2011 at 6:30 pm

I would suggest that the government stop using the Social Security as a slush fund..when other programs run out, they delve into the SS fund for a bail out!If the government would repay the SS fund and put the interest on it that banks charge, there would be no worries...I think that a small charge of interest rates going up for both the employee and the employer would also help to alleviate it...but NOT unless there is a STOP GAP put into place for misappropriation of the Social Security funding!