The longer we wait, the more painful the solutions will be.
When the Social Security trustees issued their annual report recently, you could almost hear a collective sigh of relief across the country. The long-range financial outlook for the nation's crucial retirement system is still on track to pay benefits for another 20 years — the same forecast as last year's report. Meanwhile, Medicare's prognosis improved a bit.
But don't pop the champagne corks just yet.
By 2033, reserves in the Social Security trust fund will be exhausted and revenue from payroll taxes will be sufficient to pay just 77% of promised benefits. The disability trust fund is in worse shape, projected to exhaust its surplus in just four years, at which point it could pay just 80% of promised benefits. And Medicare is now expected to limp along through 2026, two years later than previously projected.
Congress has always stepped in to save the Social Security system from financial ruin and I'm sure it will again. As a Capitol Hill reporter for United Press International, I had a front-row seat to history the last time Congress approved Social Security reforms in 1983. It was the ultimate grand bargain brokered by Republican President Ronald Reagan, Democratic House Speaker Tip O'Neill and bipartisan commission chairman Alan Greenspan.
Although the legislative gridlock of today's polarized Congress may not inspire hope for an agreement on Social Security anytime soon, at least one Washington policy wonk thinks that a divided government presents the perfect opportunity to begin the necessary hard work before the next presidential election.
“We know from history that safety net fixes are most feasible under divided government because no one party wants to carry the load alone,” said Jim Kessler, senior vice president for policy and co-founder of Third Way, a centrist think tank in Washington.
During a bipartisan panel discussion this week on the challenges facing Social Security, Mr. Kessler argued that the time is right to tackle the problem. “Insolvency is near enough to focus the mind and far enough away to require only modest fixes,” he said.
Mathematically, Social Security's financing problem can be solved either by increasing revenue or reducing benefits. Politically, the solution must come from a combination of the two.
But the generational chasm over funding benefits for an aging population at the expense of investing for the future through education, infrastructure and technological innovations could be the bigger challenge.
Over the past week, I attended two deep-dive briefings on the implications of the trustees' report.
During the first one, National Academy of Social Insurance vice president Virginia Reno stated that Social Security benefits already have been cut enough through changes approved in 1983 that still are being phased in.
The gradual increase in full retirement age to 67 for those born in 1960 and later, combined with the taxation of benefits on higher-income retirees, amounts to a 23% cut in benefits, she said.
Future efforts to shore up the critical retirement system that provides the main source of income to most seniors should focus on the revenue side, Ms. Reno said.
The entire Social Security shortfall could be eliminated by gradually raising the payroll tax to 7.2%, from 6.2%, over the next 20 years and phasing out the cap on taxable wages — currently $113,700 — over the next 10 years.
The next day, a decidedly younger audience, many of whom probably were the interns that traditionally swarm Washington at this time of year, listened to a bipartisan panel of Social Security experts that included Mr. Kessler and Ms. Reno.
Despite his background as a Democratic Capitol Hill staff member, Mr. Kessler called the proposal to raise revenue by eliminating the cap on taxable wages “a liberal fantasy” that would result in a top marginal tax rate on high earners of nearly 50%, due to the combined impact of income taxes (39.6%), Social Security (6.2%) and Medicare (1.45%) taxes, and a new Medicare surcharge (0.9%).
UNDER-30 GENERATION
Giving voice to the under-30 generation, Nick Troiano, co-founder of The Can Kicks Back, a nonpartisan campaign to engage young Americans on the issue of the growing national debt, said that any Social Security-financing solution must balance the needs of today's retirees against crucial investment in the future.
“This is about a moral obligation of [not] leaving the younger generation with a giant IOU,” he said.
Fixing Social Security won't be easy, but the sooner we get started, the better. As the past few years have shown, Social Security benefits were the one part of the retirement income puzzle that retirees could count on.
As the mother of two 20-something sons, I want to make sure that they will be able to assemble their own retirement income puzzle.
Mary Beth Franklin is a contributing editor at InvestmentNews.
