Opinion: How To Dig Social Security Out Of Its Fiscal Hole

Richard F. Keevey | May 1, 2019 | Opinion
The ratio of contributing workers to recipients has dropped as life expectancy increases, from 16 to 1 in 1950 to 3 to 1 today

Richard F. Keevey
Approximately 1.5 million New Jersey residents receive Social Security checks totaling $24 billion and generating $41 billion in economic output in New Jersey. Approximately one in six New Jersey residents receive Social Security — 70 percent are retirees; 30 percent are not, such as widows or widowers, people with disabilities, spouses and children.

The average check is $1,553 per month ($18,646 per year). Incidentally, our average check is the highest in the country; nationwide, the average is $1,460. Forty percent of our state’s 65+ populations would have incomes below the poverty level without Social Security; and three in 10 rely on Social Security as their only source of income.

There are many folks who receive the maximum, which for the current year is approximately $34,500 per year, but many of our citizens struggle with a much lower payments. Payments are based on wages received during one’s work life, the number of years worked and the age payments begin. Early retirement payments can be received at age 62 — at a discounted amount — or full payments, now at age 67. Each year an adjustment is made if there is an increase in the cost of living. In 2019 the increase was 2.8 percent; in 2016 there was no increase.

Now if you are as old as me you have no concerns about receiving full payments as scheduled. But if you become eligible after the year 2034, start worrying, as present projections suggest that your check will be reduced by 21 percent.

There are solutions to this problem but it must be addressed sooner than later. In my judgment the solutions are straightforward and logical, but of course are not being addressed because of politics and the failure of leaders to step forward with the needed solutions, as changes are not without controversy. But first let’s understand a little bit more about this critical program.

Social Security as it exists now

Social Security is the single largest program in the federal budget with outlays of $1 trillion — almost 25 percent of the federal budget. The 2018 Report of the Board of Trustees of Social Security says that the unfunded liabilities of the Trust Fund are $14 trillion and beginning in 2018 Social Security would begin drawing down its fund reserves to pay for benefits as current revenue flow is not sufficient — and by 2034 resources will not be sufficient to make full payments to recipients. A few additional facts about the Social Security program are worth noting:

  • 175 million people pay into Social Security at a payroll rate of 6.2 percent of salary (up to a maximum salary of $132,900). The employer pays a matching rate. (An additional 1.45 percent of salary — plus the employer share — supports a portion of Medicare Part A; there is no salary cap on this portion).
  • 62.6 million people receive payments — retirees and survivors (52.4 million); and people with disabilities (10.2 million). By 2050, 85 million folks will be eligible.
  • The Social Security Trust Fund currently has a surplus and has been loaning this surplus to the Treasury’s general fund for many years — with a commitment to retrieve these loans with interest when future expenditures exceed current revenues. These repayments will begin next year.
  • The Fund will not be bankrupted as some suggest. According to the Trustees’ Report, the fund will be depleted, including all loan repayments, by 2034. Thereafter, the fund will collect sufficient revenues such that recipients would receive 79 percent of scheduled payments.
  • The fund’s insolvency is a function of an increase in life expectancy, a decline in fertility rates and a lower ratio of workers to retirees. For example, in 1950 it was 16 to 1; in 1960 5 to 1. Today it is 3 to 1 and by 2025 it will be 2.3 to 1.
  • 48 percent of older couples and 70 percent of unmarried individuals depend on Social Security for more than 50 percent of their income. And benefits are modest — again, the average nationwide is $1,460 a month.
  • Options for solutions

    As always there are myriad options to address this problem. For those interested in reviewing an extensive list, the Congressional Budget office (CBO) issued a report entitled “Options for Social Security Reform.” It discusses 37 options with the dollar impact of each. No single option would create long-term stability for the program. Some options would affect all workers or beneficiaries similarly; others would have widely disparate effects, depending on a beneficiary’s year of birth or lifetime earnings. The effects of many options would change if implemented on a larger or smaller scale or phased in more slowly or quickly.

    In short, there are basically three options: increase taxes, reduce benefits, privatize the system. Each is worthy of extensive analysis and debate, but for our purposes a few brief comments are appropriate. Some argue for gradually increasing the payroll tax rate by 3 to 4 percent over a period of 20 years and reducing the annual cost-of-living adjustment (COLA). Others suggest increasing the retirement age to 70 or higher. Others would cut monthly payments.

    Another option is to privatize the system by moving from the current “defined benefit” model to a system where new beneficiaries and those over a certain age (perhaps 50) are moved into a system for private accounts — think 401(k). There are several variations of this approach and, in fact, President George W. Bush proposed such an approach in 2005. Analysis by the Urban Institute suggested it could be favorable but was very dependent upon the status of the individual (single, married, male or female); salary earned (higher income folks would clearly benefit); and willingness to assume risk. The option is not without merit, but it was ultimately abandoned, and I suggest it has little chance of reappearing.

    If lawmakers chose a third option — cut benefits to solve the problem — dramatic reductions would be necessary. A reduction of up to 23 percent to current and future participants would be necessary to approach a solution. This type of approach is not desirable given the very negative impact it would have on the vast majority of folks who already receive only $1,460 a month.

    A recommendation for how to proceed

    I suggest a combination of the following:

  • Eliminate the taxable maximum. Specifically, instead of taxing only the first $132,900 (the level in 2019), individuals would pay Social Security on their full salary. Thus, an individual earning $1 million would pay on full salary rather than just $132,900. This approach, however, would not be sufficient as only 6 percent of the working population is impacted;
  • A gradual increase in age to qualify for full benefits from 67 to 68½ over a period of 10 years;
  • An increase in the payroll tax rate of 1 to 2 percent over the same time line.
  • Additional analysis and number-crunching is necessary to determine the exact combination, but such an approach would remove the threat of decreasing Social Security benefits from the national agenda — and make federal budgetary decision-making simpler. More importantly it would allow the focus to be where it is most critical: expanding healthcare while containing its costs, and developing a better national tax policy.