Tuesday, May 11, 2010

Will a fix to Social Security cure our country’s long-term fiscal problems?

Social Security reform has been a hot topic for some time now. Many people are worried that there won’t be any money in Social Security retirement benefits by the time they are old enough to retire. Health care reform passed, great. Will the issue of Social Security be next on the Obama agenda?

According to CNN Money, a March report from the Congressional Budget Office estimated that starting this year, Social Security will, for the first time; take in less revenue than it has to pay out in benefits. However, when the Social Security system gets strained by the large baby-boomer population all hitting retirement age, then Social Security will be taking in less than it has promised to pay out, and the government will need to make up the difference. How? By paying back the surplus revenue that has been paid into Social Security over the years. That surplus revenue, including the interest owed will allow the system to continue paying out 100% of benefits promised until around 2037. After that, the program would only be able to pay out 76% of promised benefits …if we don’t do something. Experts agree Social Security reform will be less painful if it is implemented gradually.

Here are the options according to CNNMoney.com:

Increase the retirement age: One option that gets a lot of buy-in from policy experts is a slow increase in the retirement age at which one may collect full Social Security benefits. Today, it's 66, and it is scheduled to increase to 67 by 2027.

But Social Security experts say that won't keep pace with increases in life expectancy, meaning retirees are likely to be collecting benefits for longer than the system can support.
Increasing the retirement age by just one month every two years starting in the 2020s could fix 20% of the program's shortfall, said Ron Gebhardtsbauer, who teaches actuarial science at Pennsylvania State University and is on the board of the American Academy of Actuaries. It could cure 30% of the shortfall if, in addition, the retirement age were accelerated to 67 over the next six years, he added.

Reducing growth in benefit levels: Another measure that has gotten a lot of attention is "progressive indexing." Such a measure would not affect the promised benefits for lower income workers but would lower future benefits for middle- and high- income workers relative to what is currently promised.

Under progressive indexing, the Social Security benefits of higher-income workers would be indexed to inflation rather than to wages, as is currently the case. That would have the effect of reducing benefits from their current promised levels because inflation tends to grow more slowly than wages.

Raising the payroll tax: There is also the option of increasing the Social Security payroll tax rate on wages or raising the cap on how much of wages is subject to the payroll tax (currently it's the first $106,800).

More than likely, a combination of these measures would be proposed.

While answers have long been listed on the Social Security quiz sheet, the political will to implement them has been missing, Bixby said. "Everyone knows what needs to be done, but no one wants to do it."

Yet faced with mounting challenges on the federal balance sheet and a dicey debt environment, that all may change soon enough.

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