5 Principles for Fixing Social Security
Alicia H. Munnell is a columnist for MarketWatch and director of the Center for Retirement Research at Boston College.
Guidance to help policymakers choose among myriad reform options
Someone asked whether I wanted to put together a specific list of changes to the Social Security program with attendant cost estimates. After some thought, I declined. While I care very much about the future of the program, solving Social Security’s financing challenge is conceptually easy – the problem is relatively small and dozens of proposals have been vetted and “scored” by the Social Security actuaries. Some recent packages of revenue increases and benefit cuts were included in the so-called Simpson-Bowles proposals and in the report of the Debt Reduction Task Force chaired by Former Republican Senator Pete Domenici and budget expert Alice Rivlin. Listing my personal favorites would add little to the debate.
The question, however, did force me to list a number of principles that I would like Congress to keep in mind when they come to tackling Social Security solvency.
- Think very carefully before cutting benefits because retirements are at risk.
The need for retirement income is increasing as people live longer, health care costs rise, and two thirds need some long-term care. At the same time the retirement income system is contracting. Social Security will replace less of pre-retirement income as the Full Retirement Age goes to 67, and employer-sponsored plans – for those lucky enough to have them – are increasingly 401(k)s with modest balances ($120,000 for the typical household approaching retirement). The Center for Retirement Research’s National Retirement Risk Index shows 53 percent of households are at risk of not being able to maintain their standard of living once they stop working. Thus, we should be careful about large cuts on the benefit side.
- Everyone needs Social Security; not just the poor.
Many commentators suggest cutting back benefits for “higher” paid workers and introducing some minimum benefit for the poor. These proposals suggest that someone earning today’s taxable maximum of $110,100 does not need the benefits promised under current law. On either coast and in most urban areas, people earning $110,100 are not rich, will have only a small 401(k)/IRA, and will have little in the way of non-retirement assets other than their house. They are going to need the Social Security benefits provided under current law.
- Retain payroll tax financing.
Financing Social Security benefits with an earmarked source of revenue protects the program from the vagaries of annual appropriation and clarifies the link between contributions and benefits. Some liberals and some conservatives have advocated eliminating or revamping the payroll tax. Granted the tax – without exemptions and deductions – is regressive, but the program as a whole helps the lower paid – particularly when one includes disability as well as retirement benefits.
- Fix Social Security sooner rather than later.
Several factors argue for fixing Social Security as soon as possible. First, the longer we wait to make the needed changes in contributions and benefits, the larger the changes need to be. Second, the financing shortfall is embedded in the long-term budget projections, so eliminating the shortfall will improve the budget outlook. Third, restoring balance to Social Security will make Americans feel more secure about their retirement.
- Working longer is the key to health of both Social Security and the nation.
The smaller the number of retired people, the bigger will be the nation’s economic pie and the larger the slice going to working Americans. Thus, increasing the Full Retirement Age (after it reaches 67) in line with improvements in longevity seems like a reasonable form of benefit cut. My preference would be also to raise the Earliest Eligibility Age from 62 to, say, 64, so that people are not tempted to take substantially reduced benefits early. Such a change would have a substantial impact on retirement behavior. The problem is that a portion of the population – due to health or job market problems – simply cannot work longer. They will need some support between 62 and 64. The trick is to design or adapt a program to meet this need that does not undo the incentives to work longer.
I found the exercise of identifying major considerations involved in fixing Social Security more helpful than selecting among the myriad of options available to solve the financing problem. Social Security is a wonderful program; let’s take good care of it.
