5 Ways to Reform Social Security

The spectre of insolvency is troubling, but all reform options present serious drawbacks.

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In an economy this weak, no news is good news.

New Census data shows that from 2007 to 2010, median household incomes dropped for every age group except people 65 and older, for whom it actually grew 5.5 percent since the period before the recession. But a Census Bureau official also tells U.S. News that data suggest that household income may be on the rise due to seniors "doubling up"—combining households with other family members or individuals—not to mention the many older Americans who have been forced to delay retirement and are still working.

[Read about the president's job-creation ideas.]

Given the fiscal challenges facing both the federal government and America's large and growing population of seniors, it's no wonder why the program is a hot-button issue. According to the nonpartisan Congressional Budget Office's 2011 long-term budget outlook, the program's trust fund is projected to be insolvent as early as 2036. Meanwhile, the Census Bureau reported this week that 13.8 million Americans 65 and older would be below the poverty threshold if it weren't for income from Social Security. Many seniors rely heavily on the program: 43 percent of unmarried Social Security recipients get 90 percent of their income from the Social Security, whose average monthly payout for an individual retiree as of December 2010 was $1,176, making for an annual payout of $14,112.

Republican presidential candidates have begun touching the so-called "third rail" of America politics, none more forcefully than Texas Gov. Rick Perry who has branded it a Ponzi scheme. However, candidates' assertions that the system needs to change outnumber concrete ideas about reforming the system. This is understandable, as every potential solution seems to carry with it a heavy economic or political price tag. Below are a few of the more common ways to reform Social Security and the risks, political and economic, they bring.

[Read about how the Fed might try to grow the economy.]

Switching the Cost Of Living Calculation

Currently, Social Security's cost of living adjustment is determined by using the traditional Consumer Price Index. The "chained" CPI, however, attempts to reflect how consumers change their spending habits in response to price changes—buying chicken when the price of steak goes up, for example. While this will mean smaller benefits, it could particularly hurt older beneficiaries.

"The very fact that it raises money shows that less money is going to people," says Monique Morrissey, an economist at the liberal Economic Policy Institute. "The oldest old tend to be the poorer population in Social Security."

Means-Testing

It sounds like an easy fix—shift money from the wealthiest retirees to the recipients who need it most—but in the long run, the politics of means-testing might jeopardize the program's popularity. Making Social Security more redistributive takes away from one of its basic premises: that workers who pay in more over their working lifetimes get more out of it in retirement. Viard says that means-testing is unpalatable on two levels: "That's a penalty on saving, so I think that makes it economically undesirable. [And] it makes Social Security look like a welfare program, which is politically unappealing." Morrissey agrees that such a change would hurt the system's wide approval. "The political problem is that, historically, programs that become focused on low-income workers eventually shrink. Social Security's strength is that it's universal," she says.

Raising the Retirement Age

Proponents of this solution point out that life expectancies have grown, meaning that beneficiaries receive benefits for longer and thus can and should also work longer. Raising the eligibility age for full benefits is a solution that makes logical sense but could mean hardship for some. "Some people have easy jobs that they really love, and some people have jobs that they don't want to do at 68 years old," like assembly line work, says David Shulman, senior economist at UCLA's Anderson Forecast. Morrissey points out that raising the retirement age thus means a benefit cut for many, as workers are first eligible for benefits—albeit reduced—at 62. "[Raising the normal retirement age] doesn't directly in any way affect when people retire; it just reduces how much they get at any given age," she says.