Written by Jeff Thredgold, President, Thredgold Economic Associates
A number of media stories have appeared in recent weeks discussing the fact that Social Security payments now exceed the inflow of funds into the system…and years sooner than expected. Note: one more impact of the Great Recession, as millions of lost jobs reduced Social Security tax inflows.
The stories point out that Social Security will now begin to draw from the $2.5 trillion Trust Fund that has built up rapidly during the past 2-3 decades, as revenues exceeded payouts. Many of the stories also point out that this Trust Fund is largely mythical, as the U.S. Congress routinely spent these excess funds each year and replaced them with government IOUs. Nevertheless, there is no question that the Trust Fund will be “honored” by the Congress as a means to supplement Social Security in coming years.
Many of these articles make recommendations as to how to “fix” Social Security for coming generations, noting the projected $5.3 trillion funding shortfall over the next 75 years. Some of the more radical proposals suggest raising withholding taxes from the current 6.2% rate applied against the first $106,800 of income (matched by the employer) to a higher level such as 6.6% or 7.3%, or simply taxing higher incomes by abolishing the current cap of $106,800.
Others suggest stretching out the retirement age further for when younger people can draw partial or full benefits. In reality, a combination of modest adjustments made sooner rather than later would address the problem.
Noted below are our recommendations to address the future of Social Security as discussed in our book econAmerica, released three years ago by major publisher Wiley & Sons…
Tinkering Around the Edges
What the Social Security program requires is some “tinkering around the edges” to make the program financially viable for future generations when funding pressures are more painful. These changes will require bipartisan cooperation.
My parents both draw Social Security. I tell them they have nothing to worry about relative to Social Security viability in their lifetimes. As a Boomer, I will not draw full benefits until age 66 (younger boomers age 67). I tell my married kids that Social Security will be there for them, but not to plan on drawing it until they are 68 or 69 years of age.
I favor proposals that stretch out the retirement age for younger people. This change reflects the reality that younger people will be able to work longer if they wish, will live longer and will, correspondingly, draw Social Security payments longer.
A minor change in the inflation calculation used to determine initial benefit payments for higher-income earners is desirable. Such higher-income workers would have their future payment schedule inflation-adjusted by the change in consumer prices. Lower-income workers could continue to have initial payment levels inflation-adjusted by the average annual growth in wages, resulting in their getting a slightly better deal in the future than higher-income workers.
I would suggest a slightly faster boost in wages subject to current taxation. For example, the annual adjustment to the wage cap might be the change in consumer prices (current law) plus an additional 1 percent each year during the next decade.
Providing greater incentives for people to save for retirement is advisable. Additional or expanded programs like the 401(k) would help minimize the role played by Social Security for millions of future retirees.
In coming weeks we will look more at the broad entitlement issue that must be addressed by a (hopefully) responsible Congress.