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Strengthening Social Security for the long run

First, unlike in 1983, today’s Social Security program faces no near-term financial crisis.  In 1983, the program’s reserves dropped nearly to zero, and immediate action was required in order to pay all scheduled benefits on time; the challenge was to avert a short-term crisis. In 2010, Social Security has sufficient financing to pay benefits for decades to come. The challenge today is much different – it is to secure the program for the long-term future, usually defined as 75 years and perhaps beyond.

Second, in 1983 a bipartisan commission appointed by President Ronald Reagan and chaired by Alan Greenspan focused on the short-term crisis. It proposed a relatively balanced package of reforms designed to carry the program through the 1980s, the bulk of which Congress enacted. Some of these reforms also had an effect on the long-term finances of the program – but the commission’s package failed to close the long-term gap that the program faced.

Congress closed that gap solely through an additional benefit reduction. It raised the retirement age from age 65 to 67 in the future, a benefit reduction still being phased in today. Congress did not add any new long-term revenue, even though providing future revenue to accommodate changing demographics had been a practice in the past.

Third, Social Security benefits already will be less adequate than in the past. Benefits as a percent of career average Social Security earnings are declining – from about 41 percent in 1986 to 39 percent in 2005 to an estimated 32 percent in 2030. Benefits are modest – about $14,000 annually on average in 2010 – but are the main source of income for most of our elderly. And, as too many Americans are painfully aware, other sources of retirement income are becoming less secure and less adequate.

Despite growing economic uncertainty faced by working Americans, we will be spending less per Social Security beneficiary in the future. While the cost of the program will increase from about 5 percent of the economy today to about 6 percent 75 years from now, the percent of the population receiving benefits will increase from about 17 percent to about 25 percent.

Contrary to the primary focus of current discussions, the adequacy of benefits already is a growing concern that will become ever more compelling in the coming years. Adequacy must be a part of the current debate. Even low-cost, targeted changes can accomplish a great deal.

One change, for example, would help those who work long careers at low pay. A special minimum benefit was enacted in the 1970s for this population, but because it was not indexed to keep pace with wage growth as regular Social Security benefits are, it is no longer effective. The minimum benefit could be updated to 125 percent of the poverty line for someone who has worked 30 years and retires at the full-benefit age.

Paying for modest improvements like this and covering the projected long-term deficit facing Social Security would require additional financing equal to just over 2 percent of taxable payroll over 75 years. There are many options that could be considered to raise this revenue.

For example, in 1977, Congress set a goal of collecting FICA tax contributions on 90 percent of all covered wages. But because the earnings of those who make more than the cap on taxable income ($106,800 in 2010) have risen much faster in recent years than the earnings of others, only about 83 percent of earnings are subject to the FICA tax today. Gradually lifting the cap over a 10-year period to again cover 90 percent of earnings would eliminate about 39 percent of Social Security’s projected long-term shortfall.

Another 13 percent could be eliminated by treating all employee contributions to salary-reduction plans, such as medical spending accounts and dependent care accounts, as 401(k) contributions are treated. The latter are exempt from income taxes but subject to FICA contributions for Social Security and Medicare.

Among other options, the remainder of the shortfall could be covered by potential FICA rate increases in the distant future, like those Congress has enacted throughout most of Social Security’s history to keep the system in long-term balance. An increase could occur in 12 to 15 years when the program will start to draw down its trust fund reserves, and another in 40 or 60 years.

To some it may seem strange even to suggest a revenue increase. But Americans hold Social Security in a special category – one they are willing to support with their hard-earned money, as survey after survey reveals.

In 2009, for example, the National Academy of Social Insurance and the Rockefeller Foundation found that 77 percent of Americans – including 87 percent of Democrats, 75 percent of independents and 67 percent of Republicans – agree it is critical to preserve Social Security for future generations, even if it means increasing working Americans’ contributions to the program. An AARP survey released in August 2010 found that 85 percent of adults oppose cutting Social Security to reduce the deficit, and 72 percent “strongly” oppose doing so.

Adopting targeted improvements to Social Security and a long-term financing plan to pay for future benefits would be equitable and affordable, and would reflect the views of the American people. Most importantly, it would give Americans greater confidence in their own economic future.

Janice Gregory is president of the National Academy of Social Insurance, a nonprofit, nonpartisan organization made up of the nation’s leading experts on social insurance. She was instrumental in the work of the Ways and Means Committee when the landmark Social Security legislation of 1983 was enacted.


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