Social Security Needs Saving Again

Social Security is a perennial crisis. Eighty-three percent of Generation X and 77% of millennials say they worry that the program will run out of money in their lifetimes, according to a June 2021 Harris poll for the Nationwide Retirement Institute. The latest report of the Social Security Trustees backs them up, finding that the Old Age and Survivors Insurance trust fund “will be able to pay scheduled benefits on a timely basis until 2034, one year later than reported last year.” That’s only 12 years from now.

When Congress passed the Social Security Act of 1935, 42 people worked for each 65-year-old retiree. The trust fund ran surpluses for years. But as life spans grew longer and birthrates declined, fewer wage earners were called on to support more retirees. By the start of the Covid pandemic, there were only 2.7 workers per retiree.

Many of today’s problems date back half a century. Just before the 1972 election, Congress and President Richard Nixon raised Social Security payments by 20% and added annual cost-of-living adjustments, or COLAs. Within a decade, the crisis was clear. In the spring of 1982, despite my nervous Senate staff, I sent Minnesotans a newsletter titled “Saving Social Security.” It contained 19 suggested reforms, plus a table enabling readers to rate each proposal. The response was overwhelmingly positive.

In 1983 Congress established the Social Security Reform Commission. It recommended and Congress agreed to increase the full retirement age—at which a retiree is eligible for full benefits—from 65 to 67. The increase was gradual, over 44 years, and will be fully in effect in 2027.

I’ve updated my reform proposals:

Raise the full retirement age further. Starting in 2028, it would go up by one month every half-year until it reaches 68½ in nine years. That means that in 101 years (1935-2036) the full retirement age would have risen 3½ years—far less than the increase in average life span over the same period.

Raise the early eligibility age. Since the 1960s, all workers have had the option of retiring at 62 with benefits reduced by around 25%. Most retirees now claim Social Security at 62, and the rising full retirement age strengthens the incentive to do so. Once it’s at 67, holding out for higher payments will mean giving up five years’ worth of benefits—a three-year gap will have widened to five.

If my first reform were enacted, the gap would grow further, to an irresistible 6½ years. So Congress should return to the three-year gap by raising the early eligibility age to 65½ as soon as possible.

Change the way benefits are calculated for new recipients. At a 1983 White House Rose Garden ceremony, I sat next to a Senate member of the Social Security Reform Commission. I told him, “You can fix Social Security by not indexing the bend points for five years.” His response: “What the hell are bend points?”

Bend points determine how much your initial Social Security check will be. First they take the 35 years of your highest income. Thirty-five years ago, you were a junior employee and the dollar didn’t go as far. So each year’s wages are adjusted for inflation to compute an average monthly wage in today’s dollars.

Using the present rules, assume you’re retiring in 2022 and your average inflation-adjusted monthly wage is $6,572. Your first check would be $2,628.96—90% of the first $1,024 (or $921.60), plus 32% from $1,024 to $6,172 (or 1,647.36), plus 15% in excess of $6,172 (or $60).

The bend points are $1,024 and $6,172. They were $230 and $1,388 in 1982, when I wrote my constituent newsletter. The growth in benefits could be constrained by indexing the bend points every other year rather than annually for six to 10 years. In addition, the initial benefit should be based on 38 years of wages rather than 35, since Americans not only live longer but work longer, and the inflation-adjusted average wage should be discounted by 5%.

Slow the growth of benefits for new and existing beneficiaries alike by changing the basis on which they’re indexed for inflation. All indexing of Social Security now uses the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. Economists agree that the Chained CPI is the most accurate inflation index available. Between 2000 and 2020, the Chained CPI was around 0.3 percentage point lower each year than the CPI-W. The government uses Chained CPI to index income-tax brackets and the higher CPI-W to calculate government outlays, including Social Security cost-of-living adjustments—which leads both taxes and spending to rise more quickly.

Withhold some Social Security COLAs from higher-income retirees. Those who report income of more than $60,000 (a threshold that itself would rise with inflation) from sources other than Social Security could be denied the COLA every other year for up to six years.

Give the COLA not annually but every 14 or 15 months using the 12 months of lowest inflation.

Tax Social Security income for higher-bracket taxpayers, and give them the option to forgo all or part of their monthly payment. The forgone amount could be deducted as a charitable contribution. In high-income-tax states, forgoing Social Security payments would incur little or no cost. Skeptics may be surprised by how many Americans will forgo a part of their monthly checks to assure the system’s solvency for their grandchildren. The election to go would be reversible annually.

Raise the payroll tax by 0.1% of wages every other year—half from withholding, half for the employer’s contribution—for 20 years, a total tax increase of 1%.

When the Social Security actuaries and the Congressional Budget Office put numbers on these reforms, it may show that the Social Security trust fund can be made sustainably solvent without all the reforms being necessary.

If lawmakers fix Social Security, the largest of all entitlements, they would gain the credibility to fix other entitlements that underlie our budget deficits. Further reforms may be necessary decades down the line if medical advances continue to lengthen American life spans. Let’s hope so.

mr. Boschwitz, a Republican, served as a US senator from Minnesota, 1978-91.

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