Retirement Blog

Finance Blogs » Retirement Blog » Social Security and the deficit

Social Security and the deficit

By Jennie L. Phipps ·
Wednesday, November 10, 2010
Posted: 4 pm ET

The National Commission on Fiscal Responsibility and Reform, the bi-partisan commission charged with identifying policies to balance the budget, released its initial report today and took aim at Social Security.

Obviously, this is just the beginning of the discussion. However, any possible outcome is almost certain to have both an immediate and a long-term impact on retirement planning.

The committee said its goal was to "reform Social Security for its own sake, not for deficit reduction." Here are the key proposals:

  • Gradually change the Social Security benefit formula so lower-earning recipients get a larger percentage in benefits relative to what they earned, and higher-earning workers get a smaller percentage in benefits relative to what they earned.
  • Add a special minimum benefit for those people who were lifetime minimum-wage earners that will keep them above the poverty threshold, and index that minimum benefit so it stays ahead of inflation.
  • Increase the age to claim full Social Security by one month every two years. In this way, full retirement age would reach 68 in about 2050 and 69 in about 2075. Then, add a hardship exemption for those unable to work beyond 62.
  • Provide a benefit boost to current older retirees most at risk of outliving other retirement income.
  • Gradually increase the wage cap on which Social Security tax is levied to 90 percent of wages by 2050. Currently, it is 86 percent of earnings -- but because of inflation, it is projected to fall to 82.5 percent by the end of the decade.
  • Change the formula for cost of living increases to reflect the chained CPI, which is more flexible than the current method and is expected to better reflect costs that affect older people.
  • Cover newly hired state and local workers after 2020.
  • Allow greater flexibility in how benefits are claimed. This includes allowing retirees to collect half of their benefits early and the other half at a later age to minimize the impact of reduction for early claiming and would support phased-in retirement.

Source: National Commission on Fiscal Responsibility and Reform

If you want to read these proposals in their entirety, here's the commission's website.

Besides the changes to Social Security, there are many other proposals that affect retirees and those who are planning for retirement. These include items that have an impact on Medicare, Medicaid, long-term care and veterans health care, along with tax proposals that could hit some retirees and near-retirees hard. We'll talk about some of those tomorrow.

Will your retirement plan afford you haute cuisine in exotic locales? Or potluck dinners with your neighbors? Apply for a free Money Makeover, to be featured in Bankrate's upcoming Retirement Reality series.

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.
November 18, 2010 at 9:50 am

Put the SS system back the way it was before Lyndon Johnson changed it.He abolished the SS trust and put all the money into the general fund where politicians have been raiding it ever since. Stop sending billions to countries that hate us and put that money into a SS lock box where the politicians can't touch it. Let's take care of our own first.

November 11, 2010 at 9:39 am

The issue is that the Federal Gov't redirects the FICA funds directly into the General fund, then leave accounting markers that say we will fund SS out of the general fund.

Here is a different way to address SS. Out of the ~15% payroll tax collected on every $ earned, take 4% into a personal account (out of the general fund into a personal bucketed account) Corporate contribution would be reduced on income over a certain amount, but private contribution is kept for all.

This personal account is laddered with basket of US treasuries (TIPS, 2,5, 10 and 30s) All SSA overhead would have to come from the left over 11% taxes collected.

Starting at the age 62 - SS retirement age, you will have the decision to delay until next year or choose which one you want the 4% "private" account in a 45 year annuity where the stream of income is passed to your heirs until the 45 years is up or SS with whatever changes occur for the rest of your life.

This should cover the means testing and hardship cases. Hopefully this will make SSA address their own cost structure to meet the needs of the fund. There is no gaming in the stock market, no influence of corporate bond peddlers and congress would have to get its act together or borrow from us with treasuries.

End the Ponzi Scheme
November 11, 2010 at 8:33 am

Or, we could just do away with it altogether and quit stealing the future from our kids, but no politician will ever say that.