The latest Social Security Trustees report, released last week, shows a program in peril. Within three years, the Social Security disability trust fund will run out of money, at which point the program will only be able to pay 80 percent of benefits to disabled workers. Assuming policymakers decide to allow the disability fund to take money from the old-age fund, the whole program will become insolvent in 2033.
The good news from the trustees report is that the program is in no worse shape than last year. But that should be of little comfort to anyone on the program two decades from now, who will face an immediate 23 percent benefit cut regardless of age or income.
Fortunately, this tremendously unfair and indiscriminate cut can be avoided. And if we act today, it can be averted through a number of modest and gradual changes that mostly slow and speed growth and give workers plenty of time to plan.
There is no shortage of policy ideas to fix Social Security, and as far as government programs go, Social Security is a relatively simple one. Most of the goals of reform can be met by adjusting a few levers — the initial benefit formula, the retirement age, the cost-of-living adjustment, the payroll tax rate and the maximum income subject to the payroll tax.
Indeed, with an online program called The Reformer: An Interactive Tool to Fix Social Security, anyone with a computer and an Internet connection can design his or her own reform. The tool lets users identify the tax and benefit changes they like in order to make the system sustainably solvent for the next 75 years and beyond.
Want to close the shortfall mainly on the spending side? Start by slowing benefit growth for the top 70 percent of beneficiaries and indexing the retirement age to growing life expectancy. Those two changes alone will get you three-quarters of the way toward solvency.
Want to close the shortfall mainly on the revenue side? You can close that same three-quarters of the gap by increasing the payroll tax from 12.4 to 13.5 percent and raising the maximum amount of income subject to the payroll tax from $114,000 to roughly twice that (though this plan would do far less in the 75th year).
Reforms ranging from measuring inflation more accurately to altering disability benefits to applying the payroll tax more broadly can close the remaining gap and even leave room to enhance benefits for some populations.
As a matter of policy, reforming Social Security just isn’t that hard. And changes can be made in ways that encourage work, exempt current retirees from benefit reductions, protect or enhance benefits for the most vulnerable and keep future benefits at least as generous as today’s for almost everyone else.
Unfortunately, politics has gotten in the way, and politics could be the program’s undoing. Benefit changes as sensible as measuring inflation more accurately have become an anathema to the AARP and to many on the left. And revenue changes as modest as gradually increasing the percentage of wages taxed to the levels seen in the mid-1980s are opposed by Grover Norquist and many on the right.
As a result, inaction may be good politics today, but it is incredibly myopic.
While both sides may prefer to wait until they are in a position to enact a solution on their own terms, the choices necessary to close the shortfall will be much more painful for both sides if we wait. As the baby boomers retire and benefits continue to grow, policymakers will soon lose the ability to phase changes in gradually and allow benefits continue to grow for new beneficiaries in real terms. And not too many years in the future, it will become impossible to exempt current retirees from changes or avoid broad benefit changes that affect even the lowest income beneficiaries.
At the same time, waiting will lead to larger and more broad-based tax increases as fewer generations will be able to share in the burden and benefit change simply won’t be able to phase in fast enough.
In the end, waiting to act will lead to unfair and unnecessarily abrupt changes that would rob today’s workers of the ability to plan and adjust.
Luckily, we have an opportunity to fix Social Security now — the easy way — if both parties are willing to come together and negotiate in good faith. But time is running out.
