Let's get one thing straight. Health care reform should be enacted before we think about doing anything about Social Security, but as we have learned today, health care reform looks to be a priority of Congress and will hopefully be finished by the end of July.
With that being said I think its time that we began the discussion of how to provide Social Security benefits without decreasing payouts to any of the millions of Americans who depend on Social Security as a means of staying out of poverty.
For the last four years we've had to put up with fear mongering from the right about Social Security's supposed "demise" as it's trust fund eventually begins to run out of money in the future.
The last time Social Security was at center stage was during the beginning of Bush's second term. He toured the nation pushing for privatization of Social Security and talked about Social Security as if it was a "crisis" that needed urgent attention. Thankfully, the American people did not support his plan. The current recession has once again brought back Social Security into the dialogue as this Yahoo news story indicates.
The gist of the Yahoo piece referenced is that the recession has put millions of Americans out of work, hence a loss in payroll taxes collected which fund Social Security. In addition, unemployed Americans are more likely to apply and receive Social Security benefits. It also states that due to the recession Social Security will begin to dip into its trust fund in order to pay out benefits in 2016 and by 2037 the trust fund will be depleted leading to a reduction in benefits.
Now, I am not raising alarm bells and screaming that we need to fix Social Security now or else the world will end. However, given the current political situation with Democrats in control of the White House and Congress I say its the perfect time to make minor adjustments thereby ensuring Social Security's solvency for generations to come.
The payroll tax that funds Social Security stands at 12.4% and is split evenly between both the employer and employee, each paying 6.2% of whatever the employee's income is up to the current cap. For 2009, the income cap for payroll eligible for the Social Security payroll tax is $106,800. This figure is adjusted every year for inflation. As far as the payout of benefits goes, each year a Cost of Living Adjustment (COLA) is assessed to benefits payed out according to the Consumer Price Index. The next COLA adjustment is scheduled for October of this year.
Source for payroll tax
source for COLA
Here is where the solutions come in...
As I see it, there are three ways to accomplish the reform that will put this issue to bed for the rest of our lifetimes.
First, as President Obama proposed during the campaign, we could adjust the cap on payroll taxes. His idea during the campaign was to apply the payroll tax on earnings over $250,000 but retain a gap in income eligible for the payroll tax going from the current cap up to $250,000. This is a start, but it may not get us all the way. This is because the amount of people affected by this change would be relatively small, according to Citizens for Tax Justice, only about 1% of taxpayers would be affected by this.
Second, we could raise the payroll tax itself by 1% total raising the total tax to 13.4%, with 6.7% payed by the employee. At the current cap on income, this increase amounts to $534, at $40,000 this amounts to a $200 a year increase. This infusion of income would most likely have the greatest impact on the ability of Social Security to remain solvent for generations to come. Even a 1/2% increase would help.
Lastly, the Cost of Living Adjustments made each year to benefits payed out could be capped at a 3% increase every year. Historically, COLA increases have been in the range of 1-5% with a few years of higher increases in the 1970s and early 1980s, the maximum being 14.3% in 1980.
I believe that a combination of all three of these options will be successful in making sure Social Security is solvent for the foreseeable future. I know that this issue is not everyone's top priority, but I think that we should still be willing to discuss the best way of handling the solvency issue.
I know there will be resistance to these proposals. There are several ways to go about handling this resistance from the right. My favorite way would be just to state the obvious "Elections have consequences" and/or "You had your chance to do something, and your idea was not popular. Now listen to what we have to say."
In closing, I believe that this is an issue we have a moral obligation to fix and that we can completely take off the table for the Republicans by fixing Social Security the right way and not by some privatization scheme thought up by Wall Street. Additionally, by acting now and using small incremental measures we can avoid having to make tougher choices in the long run.
A big thanks to my dad for his help with this diary. He has over thirty years of service to the Social Security Administration and currently serves as the manager of an SSA office.
Update: Some other ideas from commenters-
raise the retirement age
means testing
expanding the payroll tax to other incomes
What are your ideas?