How to save Social Security

There has been a lot of talk about Social Security lately.

Despite what you may have read in chain e-mails, Social Security is not a Ponzi scheme. It is a multi-generational Insurance Program – one that has worked stunningly well for over 75 years. Today, we easily forget how all but the wealthiest elderly people had to work until they dropped, or move in with their children.

Social Security has faced challenges before. In the 1980s, there was need for large scale reform, which was implemented with bipartisan support. There was also George W. Bush’s attempt to privatize Social Security in 2005, which would have ended in disaster only three years later had Bush prevailed.

Social Security is facing a major challenge in the form of a budget crunch in the coming decades. If no changes are made, Social Security will be able to pay out full benefits until 2033 – which just so happens to be the year I turn 66. After that, partial benefits will still be paid out - around 75% of benefits for the next several decades. But as someone who is planning ahead for my retirement, working full time and shoveling all I can afford into my 401K, I should not be penalized because the government is unwilling to take the necessary steps to make Social Security fully solvent for the next century. Nor should I be penalized because I didn’t grow up in a rich family and benefit from a trust fund that became available when I came of age. Social Security, in fact, was partly created to be an economic equalizer, so that everyone would be able to enjoy the fruits of their labors when they reached old age.

Social Security is funded by a 6.2% employee payroll tax, along with a matching employer tax – separate and distinct from the income taxes we all grumble about. Currently, the eligible income for the payroll tax is capped at $110,100 – in other words, after $110,100 the percentage is discarded and someone who makes a $250,000, $500,000, or million dollars or more in annual income pays the same dollar amount into the trust fund as someone who makes $110,100 per year.

As of 2010, the life expectancy in the United States was 78.2 years. (This figure is nothing to be proud of – the US is ranked 37th in life expectancy, below Cuba and above Portugal.) There has been a great deal of misunderstanding about the increase in life expectancy since 1935, when the Social Security Act was signed into law. This relates to the difference between average and median calculations. The average lifespan takes into account when every person dies, from infancy to old age. Since childhood mortality was much higher in the 1930s than it is today, using the “from birth” calculation drags the life expectancy downward – and the average life expectancy at birth was 52. It also skews the numbers because infants and children to not pay into the trust fund until they have a paying job. In 1935, the majority of Americans who survived into adulthood could expect to make it to 65, and back then there were 7.8 million Americans aged 65 or older – a not insubstantial figure in a country with a population of 128 million. In 1935, Americans who made it to 65 had a greater than 50% change of living to 78 – today, that number has risen to 86. The Social Security Act was signed with the understanding that life expectancy would rise over time, and there would be enough “cushion” in the system to accommodate this increase. What the planners did not anticipate was the huge increase in population that occurred after the end of World War II – the so-called “baby boom” – and a secondary population increase when the boomers began to have their own kids. Further, with increasing numbers of baby-boomers now collecting benefits, the trust fund is slowly being depleted.

There is also the question of how same-sex married couples are going to be treated as marriage laws evolve nationwide. Currently, nine states and the District of Columbia, with a total of 43,416,598 in population, recognize same-sex marriage. Those figures do not represent California (population 37,691,912), which briefly recognized same-sex marriage and likely will again soon. As it is now, same-sex married couples have no spousal Social Security benefits, nor any of the benefits opposite-sex married couples enjoy. But that is more than likely to change within a decade.

The time for reform has come. These reforms need not be draconian, just sensible.

First of all, I believe any reforms to Social Security should be separate from the “fiscal cliff” talks taking place at this writing. Indeed, Social Security should not be tied to any deals, budget or otherwise. The idea of cutting benefits or reducing cost of living increases (COLA increases are automatically tied to the rate of inflation) is bad economics because most recipients immediately spend their checks – putting the money back into the economy. Also, cutting benefits will not cut the deficit because Social Security does not contribute to the deficit – because it is not part of the federal budget. It is and must remain separate.

*Raise the income cap to $250,000. This change alone will make Social Security fully solvent until approximately 2087.

*Raise the retirement age – incrementally, and over a long period of time. Nobody plans their exact date of retirement ten years in advance. So, codify a gradual increase in the retirement age starting ten years after the bill is passed, with the age increasing by one year every ten years - and phasing out options for early retirement with partial benefits – until the universal retirement age is 70.

If the changes outlined above are made, Social Security will remain fully solvent well into the 22nd Century, including for those in same-sex marriages.