First, let it be said that the best approach right now is for our politicians to not even join the discussion about how to tinker with Social Security. We have much more serious problems with the nation's financial health, than a deficit date ten years out and an insolvency date thirty years out.
But this is a discussion board, and we can't really resist thinking of ways to tinker with it anyway. And most of us, uninformed as we are, start to immediately think of ways to raise taxes or cut benefits.
It turns out we wouldn't really have to do either, at least not explicitly. Read on for a summary of what could solve Social Security's solvency "problem", without introducing any of the trauma that Bush would:
All of these
recommendations (pdf) come from Robert Ball, a long-time commissioner of Social Security (via Matt Yglesias at Talking Points Memo.)
Right now, over the next 75 years, SSA projects a shortfall of 1.89% of taxable payroll. What that means is that you just need to either raise revenue, cut expenses, or find some other way to make up that shortfall. But remember that raising the tax rate is not the only way to raise revenue. And cutting benefits is not the only way to cut expenses. Here are the recommendations that Balll makes, and how much they positively affect the taxable payroll deficit:
Restore the maximum taxable earnings base to 90%, the level set in 1983. | + 0.61% |
One of the main problems is that the wealth gap has been increasing - there is a wider distance between the rich and the poor. A side effect is that while the cap has been rising with inflation, the wealth gap has meant that the taxable earnings base has fallen to below 90% . So, this proposal would restore a level that was set twenty years ago. In addition, while the cap would be raised, the corresponding benefit levels would be raised as well, which would retain the "same rules for everyone" balance that protects Social Security's "third rail" status. Removing the cap while retaining the benefit cap would remove some of Social Security's balance, and would make it more vulnerable. Removing both caps (all at once) entirely can be considered traumatic to people living in expensive markets that aren't otherwise rich - a large tax hit phased in all in one year. |
Retain the estate tax at 2009 levels, but devote it to the trust fund | + 0.51% |
This is a good political compromise, because the 2009 estate tax rates have a high exemption level, but the money that gets taxed would then go to beneficiaries who need the money to protect them from poverty, rather than to the government to pay for normal budgets. This isn't a tax hike at all, merely a reallocation. |
Invest some assets of the trust funds in stocks on a system-wide basis | + 0.37% |
Unlike the private accounts, this would be investing system-wide money into the stock market. The advantages are that no one person would have to liquidate their positions in a down market. It would all even out and the system would be able to ride out the highs and lows. Invested conservatively, this would give better returns than the Treasury Bonds. This doesn't raise taxes or cut expenses, although it does restrict the government from being able to benefit from Social Security's surplus.
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Switch to the more accurate CPI ("chained index") for determining growth of benefits after retirement date. | + 0.35% |
This is technically a benefit cut, but it is evidently a more accurate inflation tracker than the inflation number we use now. (Remember, we are wage-indexed before retirement date, but inflation-indexed after retirement date.)
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Cover all state and local government employees | + 0.19% |
Not all state and government employees are part of the social security system at this point. By converting them to have their pension plans be added on to social security, rather than replacing them, the additional payroll taxes would increase the health of Social Security. This raises revenue without increasing tax rates. |
Optional: Increase the payroll tax rates by 0.5% both for workers and employers, starting in the year that the trust fund starts to shrink. | + 0.60% |
This one is truly a tax hike, but if the trust fund starts shrinking at a later date than is projected right now, then the date of this new tax would be delayed as well! |
Now, it turns out that some of those improvements interrelate, so the overall positive impact isn't as good as simply adding them together. But, the summary is that if we implement the first three, Social Security is brought out of the "danger zone" from an actuarial percentage. (They're okay with it being with plus-or-minus 0.7%, because of how much things can change in our economy over the next several years.) If we implement the next two, we're actually in surplus by 0.05%. And if we implement the final bit, we'd have projected solvency for decades beyond the 75-year projection period.
If you would like more details, go read the report authored by Ball - it explains things much more clearly than I can in this limited space. The only thing he didn't go into that I've been curious about is how much payroll tax revenues would increase if we raised the federal minimum wage.