How the Debt Super Committee Can Fix Social Security

Last Updated Aug 19, 2011 2:26 PM EDT

Now that the 12-member Joint Select Committee on Deficit Reduction (aka the debt "super committee") has been named, the debates will begin on how to reduce our national debt. Changes to Social Security are on the table; a good place to start developing these changes is the report issued late last year by the bi-partisan National Commission on Fiscal Responsibility and Reform, otherwise known as the Deficit Commission.

I'll first summarize the Commission's more significant recommendations regarding Social Security, then add my two-cents' worth on changes I'd make to those recommendations.

The Deficit Commission's Main Recommendations

  • Make the retirement benefit formula more progressive by gradually slowing the growth in benefits for high earners.
  • Reduce poverty by providing a minimum benefit for low-wage earners. This would create a benefit for career earners that would be no less than 125 percent of the poverty line in 2017 and indexed to wages thereafter. (In 2011, 125 percent of the poverty level would be about $13,610 for an individual and about $18,380 for a married couple.)
  • Enhance benefits for the very old and the long-time disabled by adding a bump up in benefits equal to five percent of the average benefit, 20 years after eligibility.
  • Gradually increase early and full retirement ages based on increases in life expectancy, after the full retirement age reaches 67 in 2027 under the current law.
  • Give retirees more flexibility by allowing beneficiaries to collect half their benefit at age 62 and half at a later date. Accordingly, cut the reduction for early commencement of benefits. This would accommodate phased retirement.
  • For workers in physically demanding jobs, create a hardship exemption from increases in the early retirement age and full retirement age.
  • Gradually increase the maximum taxable wage for Social Security to cover 90 percent of wages by 2050; this would increase the taxable maximum to about $190,000 in 2020, instead of the nearly $168,000 taxable maximum that would exist under the current law.
  • Adopt an improved measure for the cost of living adjustment (COLA)- the chained consumer price index (CPI). This would have the effect of reducing the future value of benefits for current retirees.
My Suggested Tweaks to These Recommendations

The Deficit Commission's recommendations do a good job of making Social Security financially sustainable while protecting those who can least afford to have their benefits reduced -- namely low-wage earners, workers in physically demanding jobs, disabled beneficiaries, and the very old.

I'd add the following provisions to the Commission's recommendations:

  • Apply the minimum benefits to divorced spouses and widow's benefits. Poverty among elderly women is a real problem that really needs to be addressed.
  • Index the minimum benefit to a special CPI measure for the elderly instead of to wage increases. This recognizes that low-income elderly people spend a disproportionate amount of their income on medical bills, which rise faster than prices in general.
To the extent that these additions would increase costs, I'd adjust Social Security taxes accordingly.

In addition, I'd fix Social Security financing so that Social Security taxes are dedicated strictly to paying for Social Security benefits. This would entail one or both of the following:

  • Some combination of additional Social Security taxes or further benefit reductions so that Social Security is funded on a pay-as-you-go basis over the long run. I'd balance tax increases with benefit reductions for high wage earners.
  • Invest the Social Security trust fund in assets other than U.S. government bonds.
While I've previously objected to the use of the word "raid" in connection with the Social Security trust fund, I do think that the use of Social Security taxes for purposes other than paying for Social Security benefits undermines trust in the federal government and the Social Security program.

And I'm in favor of keeping the basic nature of Social Security -- that is, a modest level of benefits that pays a lifetime income, no matter how long you live and no matter what happens in the economy. To this foundation, retirees can add their own savings and employer-sponsored retirement benefits to increase their retirement security and enjoyment. What I'm against is changing Social Security to an account-based system that's vulnerable to capital market fluctuations -- we already have that with our 401(k)-based retirement plans.

My hope is that the debt super committee can put aside partisan differences and recommend workable compromises to make Social Security financially sustainable for our parents, ourselves, and our children.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. 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's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.