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How to Keep Social Security Solvent

October 14, 2013 By Ronald Goldser, Hindsight Community Fellow

Long-term solutions to avoid future government shutdowns and debt ceiling debates involve stabilizing financing for Social Security and Medicare. A number of ideas about the best way to accomplish that are floating around Congress. Today, we’re going to examine one idea touted by Minnesota’s Rep. John Kline and others to raise the Social Security eligibility age.

The current status of Social Security is laid out in the 2013 OASDI report from the Social Security Administration:

At the end of 2012, the OASDI program was providing benefit payments* to about 57 million people: 40 million retired workers and dependents of retired workers, 6 million survivors of deceased workers, and 11 million disabled workers and dependents of disabled workers. During the year, an estimated 161 million people had earnings covered by Social Security and paid payroll taxes. Total expenditures in 2012 were $786 billion. Total income was $840 billion, which consisted of $731 billion in non-interest income and $109 billion in interest earnings…. The dollar level of the combined trust fund reserves declines beginning in 2021 until reserves are depleted in 2033…. At the time of reserve depletion, continuing income to the combined trust funds would be sufficient to pay 77 percent of scheduled benefits.

More than three years go, in July, 2010, the Congressional Budget Office did an in depth analysis of how to make Social Security solvent. They identified thirty different options, which they grouped into five categories:

  • Change the taxation of earnings
  • Change the benefit formula
  • Increase Benefits for low earners
  • Raise the full retirement age
  • Reduce cost of living adjustments

A simple graph shows the efficacy of each of these thirty options:

Click to view full-size pdf

From this summary, several conclusions are readily apparent:

  • There are more choices to improve solvency by modifying benefits than any other category
  • Changing the index for initial monthly benefits (“PIA”) is the most effective method for improving Social Security solvency
  • Eliminating the cap on taxable earnings is the second most effective choice
  • Raising the retirement age, as Congressman Kline suggests, is not particularly effective

Changing the index for initial monthly benefits is more commonly understood as reducing the benefits for newly eligible retirees. The report suggests:

“Beginning in 2017, average initial benefits for newly eligible retirees would increase with prices rather than with prices and real earnings. Given CBO’s long term projections for growth in real earnings, initial benefits would be 1.3 percent lower in the first year than under current law, the next year they would be 2.6 percent lower, and they would decline in the same way in each succeeding year…. For people born in the 1980s, scheduled lifetime benefits would decline by about 30 percent; later cohorts would face bigger reductions.”

The National Bureau of Economic Research analyzed this option and concluded:

“that PIA indexing would reduce benefits by approximately the same rate for all wage earners and would restore long-term solvency to the Social Security system. But this method would also greatly reduce Social Security replacement rates and would potentially increase the sensitivity of system finances to unexpected earnings changes. They suggest that any reform proposal should be examined not only for its effect on benefit levels, progressivity, and system solvency, but also for its degree of political risk and likely effects on savings and labor supply.”

Eliminating the cap on taxable Social Security earnings has been frequently mentioned as a solution to Social Security solvency. This option, by itself, would eliminate the solvency problem. "Removing the cap entirely, thereby imposing a flat tax of 12.4 percent on all earnings -- essentially a $100 billion a year tax increase on the wealthy -- would more than completely close the funding gap." Of course, it is a politically volatile solution to the issue.

Changing the age of eligibility (“FRA”) is not a particularly effective method of improving the fund’s solvency, and also impacts low income workers more than high income earners.

“Increasing the full retirement age is, in most ways, equivalent to cutting initial benefits. In particular, for people who claim benefits at any given age, a higher FRA results in lower benefits…. Depending on the age at which the worker claims his or her benefits, a one-year increase in the FRA is equivalent to a reduction in a retired worker’s monthly benefit of between 5 percent and 8 percent.” 

It must be remembered, of course, that the age of eligibility has already been increased: for those born in 1937, FRA is 65; for those born in 1938-1954, the FRA is 66; if you were born after 1960, the FRA is 67. Even if this policy were chosen, there is not much room to move.

Bottom line: there are many ways to close the funding gap for Social Security. Folks who want to raise the age of eligibility should know it’s among the least effective and most regressive.

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  • Dan Conner says:

    October 14, 2013 at 11:07 am

    I favor lifting the maximum taxable earnings taxed.  Today the FICA tax is regressive.  To make it fair and solve Trust Fund solvency issues for the indefinite future tax all wages and self-employment, no matter how high they are.  This will solve the Social Security financing problem for ever more.  Then, if the rich look to restructure their income to avoid the tax, I would propose to tax whatever that income is for FICA.

    The rich have largely benefited from a reverse Robinhood feature of the current Social Security funding.

  • James D. says:

    March 31, 2014 at 9:45 pm

    I favor eliminating the spousal benefit for non-working spouses.  One worker contribution should equal one benefit.  If your family has made the decision to live on one income,  then live on one social security benefit, don’t expect the rest of us to give you 50% more because you decided to have a stay-at-home spouse.  This idea that you have to tax higher-income workers who are out there working for a living, so your wife or husband who contributed nothing to the social security fund can get a check is ridiculous.