Yes, Social Security is facing a shortfall -- but here's the fix

Many American workers fear Social Security won't be there for them when they're ready to retire, thanks to published reports about the possibility that Social Security's trust fund will be exhausted by 2034.

But that isn't a foregone conclusion -- as long as some changes are made that would not only put the program into long-term actuarial balance, but restore Americans' confidence in the system.

The overall solution is simple: Over the long term, the government needs to collect sufficient taxes from workers to pay for the benefits promised to retirees. The 2018 Social Security Trustees Report shows that the program could be put into long-term actuarial balance through a combination of benefit adjustments and tax increases, which would amount to 2.84 percent of a worker's total compensation.

While that seems like a doable goal, it's easier said than done.

Of course, there's not one single "magic bullet" that can fix the system's funding challenges by itself – Social Security will need a package of changes. So let's look at possible benefit adjustments and revenue enhancements that could get the program back on a sound footing.

Boosting revenue

The following changes could close Social Security's long-term actuarial deficit with just tax increases and revenue enhancements, with no benefit adjustments:

  • Subject all wages to Social Security's payroll tax, which currently only applies to the first $128,400 of earnings
  • Cover newly hired state and local government workers who wouldn't participate in the system under current rules
  • Diversify the trust fund to invest in the stock market in order to increase returns

The value of this combination of changes roughly equals 102 percent of the 75-year actuarial shortfall, according to The Reformer: An Interactive Tool to Fix Social Security, prepared by the Committee for a Responsible Federal Budget.

It's important to note that investing the trust fund in the stock market could create its own set of challenges. For instance, which stocks would the trust fund buy? Some observers might object to substantial government ownership of stocks, calling it socialism. At the very least, the fund might need to invest in a broad index of stocks in order to avoid the appearance favoring a particular market segment. 

Trimming benefits

The following package of potential changes could close the long-term actuarial deficit with just benefit adjustments and no tax increases:

  • Slow benefit growth for the top half of earners
  • Increase the retirement age for future longevity improvements once the retirement age reaches 67
  • Index cost-of-living increases to retirees by the chained CPI
  • Tighten eligibility criteria for disability benefits
  • Apply the benefit formula to annual earnings, instead of lifetime earnings

This package "spreads the pain" between workers and retirees, and has an estimated value of 96 percent of the 75-year actuarial shortfall.

A mixed package 

The following combination of revenue enhancements and benefit adjustments could close the long-term actuarial deficit:

  • Slow benefit growth for the top 20 percent of earners
  • Increase the retirement age for longevity improvements once the retirement age reaches 67
  • Tighten eligibility criteria for disability benefits
  • Apply the benefit formula to annual earnings, instead of to lifetime earnings
  • Subject 90 percent of wages to the payroll tax, a level that applied in 1983
  • Diversify the trust fund to invest in the stock market in order to increase returns

This package represents a compromise that roughly splits the reduction in the actuarial deficit between benefit adjustments and revenue enhancements.

Of course, there are other combinations of benefit adjustments and revenue enhancements that The Reformer shows could put the program into long-term actuarial balance. 

Congress needs to make some tough choices – but this tool shows that it's doable.  

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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.