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Hard Times for Social Security Lovers

Alicia Munnell, the director of the Center for Retirement Research at Boston College, is a weekly contributor to “Encore.

This is a hard time for someone who thinks that Social Security is one of the nation’s most important programs. Republicans and Democrats, who can’t agree on anything, recently agreed that the payroll tax cut should be extended. And the President put out another budget without any proposals to restore long-run solvency to the program. I know it’s an election year, but last year wasn’t and the President proposed nothing for Social Security then either. Undermining the revenue flow and failing to offer fixes for the financing hole puts the program at risk.

Social Security makes us do what we would not do on our own – save for retirement. And it provides insurance for us in the event that we become disabled and for our dependents should we die early. The retirement benefits are modest. The average worker who retires at 65 in 2012 gets 41 percent of pre-retirement earnings or about $1,400 per month. The program replaces more for lower earners and less for high earners. People can claim benefits at any age between 62 and 70, but Social Security adjusts the annual amount to keep lifetime benefits the same. Annual benefits are thus much lower if claimed at 62 and much higher if claimed at 70. Social Security benefits are adjusted for inflation, and they keep coming as long as we live.

Social Security is a terrific program. The problem is that projected benefits exceed scheduled taxes over the next 75 years. The good news is that – at least until people started fooling around with the payroll tax – the magnitude of the shortfall is totally manageable. And proposals abound for either reducing benefits or increasing revenues. Yes, those are the options. There is no magic bullet.

Before the 2011 payroll tax cut, the Social Security financing story was one where the average cost rate for the next 75 years was 16.2 percent and the scheduled income rate was 14.0 percent, producing a deficit of 2.2 percent. That figure means that if the payroll tax were raised immediately by 2.2 percentage points – 1.1 percentage point each for the employer and employee – the government would be able to pay the current package of benefits for everyone who reaches retirement age through 2085.

A 2-percentage point cut in the employee payroll tax changes the story. The deficit becomes 4.2 percent of payrolls. Yes, general revenues are being credited to the trust funds to make up for foregone revenues in the short run, but restoring balance to Social Security, which in 2010 looked trivial, now appears daunting. The expiration of any reduction in a tax is now characterized as a tax increase, and the resistance to tax increases is ferocious.

At the same time that policymakers are making the hole bigger, they are kicking the can down the road in terms of fixing the system. This lack of initiative is particularly annoying given that two recent commissions – The National Commission on Fiscal Responsibility and Reform (co-chaired by Erskine Bowles and Senator Alan Simpson) and The Bipartisan Policy Center’s Debt Reduction Task Force (co-chaired by Senator Pete Domenici and Alice Rivlin) – have presented comprehensive proposals to restore balance to the program.

The key question is how much of Social Security’s financing gap should be closed by cutting benefits vs. raising taxes. My view is that retirements are at risk. The need for retirement income is increasing as people live longer, health care costs are soaring, and two-thirds will need some long-term care. At the same time, the retirement system is contracting. Therefore, my preference is to make more adjustments on the revenue side than on the benefit side.

In any event, restoring solvency to Social Security is long overdue. We have known since the early 1990s that promised benefits exceed scheduled taxes. The longer we wait, the bigger will be the required changes. It takes some political will and some mechanism to reclaim the payroll tax as the economy recovers. But preserving Social Security is the key to secure retirements in years to come.


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    • How so?


    • Extending the payroll tax cut is not a real solution nor does it help sustain Social Security. There are a number of other options for making Social Security a sustainable program and for reducing the deficit. Progressive price indexing would substantially reduce the long-run funding gap to $3.2 trillion from the current law funding gap of $16.1 trillion. Thus, it would only require a modest solvency tax increase equal to 0.6% of taxable payroll. In terms of long-run spending, it would result in the second smallest program, about 82 percent of the size of the current program. Also, changing the benefit formula for SS would essentially eliminate the long-run funding gap and require no additional solvency tax. It also would produce the most dramatic reduction in spending on benefits, equal to 23% of long-run spending under the current benefit formula. In addition, it would retain the progressive nature of the benefit formula, but reduces the degree of progressivity relative to the current formula. Furthermore, raising the retirement age would reduce Social Security’s unfunded obligations for retiree benefits to $6.3 trillion and require a solvency tax of 1.3% of taxable payroll. It would result in the third-largest program, with about 87% of the current law spending. Moreover, though the distribution of net taxes would still be progressive, of the four potential changes considered it would reduce the degree of progressivity the most relative to current law. Finally, eliminating the taxable maximum would reduce Social Security’s unfunded obligation for retiree benefits to $8.3 trillion and require a 1.3% payroll tax increase. It would result in the largest program in terms of long-run spending, and would increase the progressivity of the program (

    • I experienced Social Security’s death benefit setup when my wife died last October from cancer (I was her caregiver. I realize it’s too soon to look for a new partner, but I can’t hold back my feelings about starting over and finding a new partner. My wife was very attractive and I am in need of
      friendship or more…. gIf you know any single women in their fifties in the Minneapolis, Minnesota area, please email me at

    • If as some posters suggest, that all people are willing and able to save for their retirement, why was SS created 70+ years ago? Such major pieces of social legislation do not get created in a vacuum. Many people back then were as unable or unwilling to provide for their future as they are today. (Many today can’t provide for their present, let alone their future.)

      The Depression brought to the surface that many people did not in fact save for their retirements, and their unmet needs fell upon states, cities, families, and charitable organizations who themselves were broke. Even in those “good old days”, the public was not willing to let granny starve to death in her unheated shack.

      Obviously some who commented above would prefer to see granny get her “just desserts” after a profligate life of poverty, wearisome toil, and childbearing.

    • No one will explain what happens to the money when a person dies at a younger age. than their retirement age. I know a loner who died. No relatives. Remember also that SS is given to a lot more peopl enow, than what the program was set-up for. I was told years ago, that it couldn’t work. Thats when it was 17 or so paying in, to one drawing. Now we are down to 3 or 4 to 1.
      Figure out what you pay a year and the employer, then figure what you could do with the money on your own investing and such.
      Washington DC. is big enought to give it and also big enough to take it away!

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.