Are There Other Ways to Fix It?

By Jyoti Thottam

Any plan to revamp the Social Security system runs up against the same hard truths. In 13 years retirees will be taking out more than working people are putting in. About 25 years later, the trust fund set aside for that gap is projected to disappear. Whether or not that expected shortfall is an immediate crisis, at some point we will have to tip the scales to set things right. That means putting in a little more (higher taxes) or taking out a little less (smaller benefits). The last major overhaul, in 1983, did a bit of both. The plan favored by Bush would reduce benefits by the amount diverted to private accounts, plus peg benefit growth to prices instead of wages. Here are some alternative answers--a proper fix may need more than one.

???Raising the retirement age Delaying the age at which you could begin taking your full benefits is just another way of reducing them. When Social Security was founded in 1935, the typical retirement age was 65 and life expectancy was about 60. The retirement age was changed in 1983 to gradually rise to 67. Because people are living longer, raising it to 70 would better reflect a realistic expectation of working years. Supporters say this is a fix with few costs, but it would have to be calibrated carefully. If you work longer, you could accrue more benefits, although you might have less time to enjoy them.

???Raising payroll taxes Bush says he has ruled out a tax hike, but it forms a key part of other proposals. Some would simply raise the payroll tax rate, set at 12.4%, but critics argue that would disproportionately affect working-class and middle-class families. Others, including Peter Diamond of M.I.T. and Peter Orszag of the Brookings Institution, want to raise the ceiling on taxable income. Today only the first $90,000 of income is subject to payroll tax. Such a change would generate more revenue for Social Security but affect only 6% of the work force.

???Means testing of benefits Social Security benefits are available to anyone, but should the safety net protect those who don't need it? Means testing would limit benefits for the wealthy by eliminating them above a certain threshold or reducing them as income or assets rise. That would reduce the benefit burden but could weaken support for the program. A wealth threshold might tempt people to hide assets and create a disincentive to save.

???Price indexing for benefits Today Social Security benefits are adjusted each year to reflect rising wage rates, so that seniors who made $100 a week in the 1950s still get a decent payout in retirement. Several plans for reform would instead link benefits to prices. Though benefits would keep up with inflation, price indexing would effectively be a cut, given that wages tend to rise faster than prices. Promised benefits would be smaller than currently expected.

???Direct investment Allowing Social Security to invest its assets directly in stocks, last proposed under President Clinton, could improve the system's meager returns. But it is risky and ripe for abuse. Another plan, proposed by Boston University professor Laurence Kotlikoff, would create private accounts but centralize the investing. Everyone would be invested in the same thing: a global, market-weighted index fund run by the government, not Wall Street. Because the fund would track the market, the risks of making poor investment choices would be minimized. --J.T.