How you can save Social Security

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(MoneyWatch) COMMENTARY Unless you've been sleeping in a cave for the past few decades, you're probably aware that Social Security has some funding challenges due to the aging of the baby boomers and the slowing of the economy. Now you can learn how to shore up Social Security by using AARP's online tool, Strengthen Social Security. This easy-to-use program allows you to "play lawmaker" and make various adjustments to benefits and contributions. It then shows you how much of the Social Security deficit could be reduced by making your various changes.

Are you absolutely opposed to any tax increases? Then you'll need to use the program to choose a series of benefit reductions that totally close the funding gap. For example, here's one combination of cutbacks that would balance the books:

  • Raise the full retirement age to age 68 starting in 2023.
  • Increase the retirement age for future improvements in longevity.
  • Gradually decrease benefits for the highest 50 percent earners by using a sliding scale that goes as high as a 28 percent reduction for the highest earners.
  • Use the chained consumer price index that results in annual benefits increases that are about 0.3 percent lower than the current cost of living adjustments.

As you use the program, you'll soon find that no single benefit reduction gets you close to balancing the books. For example, if you increased the full retirement age to 70 and then indexed future retirement ages for improvements in longevity, you'd only get about 70 percent of the needed cost reductions.

Do the above benefit reductions seem pretty drastic to you? Are you ready to compromise between tax increases and benefit reductions? There's a good precedent for this reasonable approach. The last time we had a Social Security funding crisis -- back in 1983 -- a Republican president worked with a Republican Senate and a Democratic House to adopt a package that was balanced between benefit reductions and tax increases.

Here's one package that could eliminate the deficit and is roughly equally weighted between benefit reductions and tax increases:

  • Increase the tax base -- which was $110,100 in 2012 -- to cover 90 percent of total wages in the U.S.
  • Add all state and local government workers to Social Security (about 25 percent aren't currently included).
  • Apply the payroll tax to salary reduction plans, such as health savings accounts or flexible savings accounts.
  • Raise the retirement age to 68 in 2023, and index future retirement ages for improvements in longevity.
  • Gradually decrease benefits for the highest 25 percent earners with a sliding scale that goes as high as a 15 percent reduction for the highest earners.

Such a package wouldn't raise taxes for the majority of Americans and would gradually phase in any benefit reductions. While the above package may not be good news, I contend that the world wouldn't end if we implemented it. And it's a much better solution than doing nothing and leaving a much bigger crisis for future generations.

I recently spoke with Jon Peterson, executive communications director at AARP and author of Social Security for Dummies, who had this to say: "Americans are fed up with all the partisan spin in Washington about Social Security. People want a strong program that will be there for their children and grandchildren. AARP put together the Strengthen Social Security Tool to give people straight facts and help make their voices heard. We want to engage the American public in this very important debate."

AARP believes that you've earned a say in this debate; you can post your recommendations to its website, and the organization will pass them along to your elected officials. AARP is not making recommendations on specific changes to Social Security at this point, so please note that the above package of suggested changes is my idea, not theirs.

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Let's support the brave politicians of both parties who are willing to follow the example of our leaders in the Reagan years, and who will work together to shore up such a valuable program as Social Security. It's the responsible thing to do.

  • Steve Vernon On Twitter»

    For more than 35 years, consulting actuary Steve Vernon helped large employers design and manage their retirement programs. Now he's a Research Scholar for the Stanford Center on Longevity, where he helps collect, direct, and disseminate research that will improve the financial security of seniors. He also delivers retirement planning workshops and has authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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