Zuckerman: Social Security Has Reached a Tipping Point

The social safety net must be mended before it becomes unsustainable.

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[Read: Great Recession Means a Diminished American Dream for Young Adults]

These growing structural deficits are driven inexorably by the facts of life in the 21st century. When Social Security began making monthly payments, back in 1940, there were 160 workers for every beneficiary. In 1950, there were 16.5 workers. Now there are three, and 20 years from now there will be two.

Life expectancy today is almost 80; when Social Security was established under President Franklin Roosevelt, it was only 62. Demographics are destiny. Fortunately, the grandchildren of baby boomers are more numerous than their parents, so demographic relief for Social Security might arrive in about 18 years (for Medicare, about 20 years).

Social Security needs fixing as a national scheme. It has been repaired before. Social Security taxes have been raised about 40 times since its inception. The initial Social Security tax was 2 percent, split between the employer and employee, and capped at $3,000 of earnings, which made for a maximum tax of $60. Today the tax is normally 12.4 percent, capped at $106,800 for a maximum tax of $13,243. (For 2011, the employee share was cut by 2 percentage points to 4.2 percent.)

The last major adjustment was in 1983 and came about when Congress and President Ronald Reagan increased payroll taxes and raised the retirement age. That enabled the Social Security trust fund to build up its surplus from about $25 billion to $2.6 trillion today. That should grow to a peak surplus of $3.1 trillion in 2020. After that, demographic trends will cause outgoing retirement benefits to increase faster than incoming payroll taxes; the surplus in the trust fund reserve is estimated to evaporate in 2037.

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What is to be done? Broadly cutting benefits should not be an option. This would undermine the program's fundamental promise of meaningful support for working Americans, especially at a time when jobs and incomes have become much more problematic. We have a real unemployment rate of 19 percent, with 25 million people unemployed or underemployed, and a poverty rate of 15.1 percent. That's 46 million Americans in poverty!

So the promise of Social Security as a backstop against poverty is more important than ever. But for the program to endure, as it must, we must not avoid the financial implications of ensuring that anyone who has worked hard and paid into the system will have the basic sustenance they need once their working days are behind them.

Here are some options to cure the problem:

  • Gradually raise the retirement age to reflect the longevity increases that have already taken place. Men born in 2004 can expect to live almost 10 years longer than those born in 1950, while women can expect to live nine years longer. In the future, this should be indexed to rise automatically.
  • Increase employer and employee payroll taxes by up to 1 percent each.
  • Eliminate or gradually raise the cap on taxable payroll income to reflect the fact that the pay of higher-income workers has been rising faster than the threshold for Social Security taxable earnings. The share of pay overall that is not taxed has increased from 9 percent to 17 percent today.
  • Increase the earliest eligibility age from 62 to 65. By some estimates, this would extend the trust fund's solvency by about five years. Current retirees would be unaffected. Exceptions would have to be made for Americans who cannot work longer due to injury, ill health, or other causes.
  • Make modest reductions in benefits for wealthier recipients.
  • Perhaps the competing Republican candidates, suitably goaded by the moderators, will drill down on these issues—they're worth as much attention as the flamboyant Herman Cain's 9-9-9! We must address the challenges soon or we face a more painful crisis, as grandma's welfare will certainly undermine the quality of life for her grandchildren.

    • Read: Scott Galupo: Republicans Are Best Hope for Entitlement Reform.