Rethinking Retirement


How to Fix Social Security

Mary Beth Franklin

Slaughtering sacred cows is essential to stabilize this cornerstone of retirement.



Two facts about Social Security are indisputable: It is one of the most successful government programs in history. And it’s slowly going broke.

SEE ALSO: Make the Right Moves to Boost Benefits

Long thought of as part of the three-legged stool of retirement stability, Social Security is the only piece that remains sturdy in the wake of disappearing pensions and inadequate personal savings. Throw in collapsing home prices and high unemployment for older workers, and the predictable lifetime income of Social Security benefits looks like an oasis in a barren desert.

But even the Social Security leg is in danger of getting wobbly. Currently, revenue collected through payroll taxes, plus interest, will be sufficient to fund retirement benefits until 2023. After that, Social Security will have to dip into the trust fund—excess tax revenues that have been stockpiled for more than 25 years—until the trust fund runs dry around 2036. (The federal government uses those trust fund dollars to pay other bills, but it pays interest to Social Security on the money it borrows.) After that, payroll taxes will be sufficient to pay only 77% of promised benefits. That’s simply not good enough.

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When Social Security was created 75 years ago, the normal retirement age for full benefits was set at 65, and the majority of people didn’t live that long. Today, when life expectancy is past 80, the normal retirement age has inched up to 66, and it’s scheduled to increase gradually to 67 in 2027.

Although everyone agrees that Social Security must be preserved, there are huge disagreements about how and when to fix it. In general, Democrats, AARP and scores of labor groups oppose any benefits cuts, and Republicans and the business community reject the idea of tax hikes. But the fact is, we will need a little of both to get the program back on track.

A middle ground. A think tank called Third Way has staked out some middle ground. It has developed a proposal to increase Social Security benefits slightly for the most vulnerable, trim benefits for the wealthy and eliminate them altogether for the super rich. (That means Derek Jeter would have to forfeit his Social Security.) It also proposes to adjust taxes in a way that won’t be burdensome for a workforce that will have to support a large and aging population of retirees.

The proposal—which reflects many of the concepts outlined by the bi­partisan National Commission on Fiscal Responsibility and Reform in its December 2010 report—would gradually increase the retirement age to 68 for today’s 38-year-olds and eventually set it at 70 for today’s 4-year-olds, with hardship exemptions for those who need to retire sooner. Pegging the retirement age to reflect increased longevity will close slightly more than one-third of Social Security’s projected 75-year shortfall.

The Third Way proposal also tinkers with the consumer price index formula that is used to set annual cost-of-living adjustments for retirement benefits. Using this alternative COLA formula to slow annual increases could close another one-third of the program’s projected funding gap.

On the revenue side, the group proposes that by 2020 the government extend the payroll tax to those earning up to $190,000 a year—up from today’s $106,800 cap. It would also tax 100% of Social Security benefits received by high-income retirees, up from 85% today. Together, the revenue changes would close the remaining third of the program’s projected shortfall.

Compromise is the essence of our political process. I saw it up close when I covered the bipartisan commission that saved Social Security from default in 1983. I know that embracing a proposal that slaughters sacred cows on both the right and the left may be unpopular, but it is essential to stabilize this cornerstone of retirement security.

Mary Beth Franklin is a senior editor at Kiplinger’s Personal Finance. She is also editor of Kiplinger's Retirement Planning 2011, available on newsstands now.



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