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How would you close Social Security's deficit?

According to the 2014 Social Security Trustees Annual Report, Social Security's "annual cash-flow deficit will average about $77 billion between 2014 and 2018." After that, the report says, the deficit will rise "steeply as income growth slows (and) the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers."

How can this deficit be closed?

The most likely way would be to adopt a combination of tax increases and benefit reductions. In fact, that's what happened the last time Congress passed major legislation to balance Social Security. Back in 1983, lawmakers approved a package that increased Social Security taxes, changed the benefit formula, subjected a portion of Social Security benefits to federal income taxes and increased the retirement age. A Republican President (Ronald Reagan) signed the law passed by a Democratic majority in the House and a Republican majority in the Senate.

A recent report from the Office of the Chief Actuary of the Social Security Administration analyzed the cost savings (or increase) associated with 121 possible changes to Social Security taxes and/or benefits.

A few things become apparent after reviewing this report. First, no single magic bullet is likely to put the program into balance: Many changes that experts have floated on various sides of the debate might make a serious dent in the deficit, but they won't finish the job by themselves. While a few potential tax increases could mostly or entirely close the gap, chances are very good they won't be politically palatable and thus will never see the light of day.

The second conclusion is that a package of tax increases and benefit reductions that largely closes the long-term deficit seems doable, but only if our lawmakers can find the political courage and will to make the necessary hard choices and compromises.

While we don't have the space here to discuss all 121 possible changes in the actuary's report, let's take a broad look at the possible benefit reductions that could be combined with tax increases to close the deficit.

Modify the cost-of-living adjustment (COLA) increase

Tinkering with the COLA increase can make a significant dent in the deficit, but it doesn't come close to eliminating it. Simply reducing the COLA by 1 percent would reduce the long-term deficit by 61 percent; a half-percent reduction reduces the deficit by 32 percent.

Using a version of the chained consumer price index (CPI), which reduces future COLA increases, would reduce the deficit by anywhere from 14 percent to 19 percent, depending on the particular method used. Using a special version of the CPI that focuses only on expenditures of the elderly (CPI-E) actually increases the deficit by 13 percent.

Modify the benefit formula

The actuary's report examines various changes to the formula that calculates the monthly benefit. The changes analyzed protect workers close to retirement and would be effective for people newly eligible to retire in future years, such as 2019, 2021 or 2023.

Some proposed changes would slow the growth in future benefits by increasing benefits for price inflation instead of wage inflation. Some benefit reductions would target higher-paid retirees while leaving benefits for lower-paid workers relatively unchanged. These benefit reductions cut the deficit by 23 percent to 89 percent, depending on the size of the targeted group and the particular formula change.

The report analyzed a few benefit increases for lower-paid workers who've been in the workplace for 20 to 30 years or more. These changes would increase the long-term deficit by 1 percent to 13 percent.

Simply reducing benefits across the board for new retirees in 2015 by 3 percent would reduce the deficit by 13 percent. A 5 percent reduction would reduce the deficit by 22 percent. On the other hand, increasing benefits for all beneficiaries by 5 percent would increase the deficit by 27 percent.

Increase retirement age

All the proposed changes to retirement age would apply prospectively to future retirees and would protect workers very close to retirement. The biggest reduction in the deficit results from a proposed change that would start increasing the normal retirement age (NRA) for those workers turning age 62 in 2017 and thereafter, and would increase the normal retirement age by three months each year until it reaches age 70 in 2032. Thereafter, the NRA would be increased for changes in longevity. This change would reduce the deficit by 48 percent.

Another proposed change would apply to people turning age 62 in 2022 and would increase the NRA from age 67 by two months per year until the NRA reaches age 69 for people turning age 62 in 2034. Thereafter, the NRA would increase by one month every two years. This change would reduce the deficit by 35 percent.

The report analyzed 11 other possible changes to early and normal retirement ages, with associated cost reductions that ranged from 13 percent to 31 percent.

The actuary's report cautions that the cost of combinations of different benefit changes might not be the same as simply adding up the costs for each change, due to interactions between the potential benefit changes, but it can give you a good idea of what the results might be.

A few years ago, AARP developed an online program that let you put together packages that combined tax increases with benefit changes so you could try for yourself to close the deficit. While the cost data isn't as current as the latest report from the Office of the Chief Actuary, by using the AARP program, you'll get an idea of the effect of various combinations.

Social Security has widespread support among citizens of all ages and political beliefs. Because of that, scrapping the program altogether or instituting a major restructuring are both most likely nonstarters. There's also widespread support for adopting some combination of benefit reductions and tax increases, so you'd think doing nothing would also be unacceptable to the public.

If you had a say in the matter, what would you do?

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