How to Save Social Security Without Too Much Pain For Anyone

By James Walker

In recent years there has been growing panicky talk about how Social Security will go bankrupt in 2033 when its trust fund is depleted and that we are doomed to abject poverty after that. Preventing that outcome will be so difficult and painful as to be almost impossible. We might as well all go and eat some worms. It is true that if nothing is done until that time Social Security will only be able to pay 78% of the then promised benefits which will be considerably larger than they are today.

John Reckenthaler, a regular blogger writing for Morningstar, wrote an excellent article based on data from the American Academy of Actuaries Committee for a Responsible Federal Budget. He identified nine possible steps which could be taken to reduce the shortfall, none of which would impose a severe hardship on anyone.

No one of these measures if taken alone will entirely eliminate the problem but there are many combinations that taken together will make Social Security solvent for many years into the future. We should choose the most acceptable combination and enact it into law now.

Let us look at these possible measures as a table with commentary.

Possible Action	Percent of Needed $	Burden Borne By
1) Eliminate the tax cap	88%	Salaries above $160K
2) Eliminate the tax cap for salaries above $400K leaving a “doughnut hole” between $160k and 400K.	71%	Salaries above $400K
3) Raise Social Security tax 1% (0.5% on employer and 0.5% on employee).	30%	Small tax increase on employer and employee
4) Raise Social Security tax 2% (1% on employer and 1% on employee).	61%	Employer and employee split a modest tax increase
5) Raise full retirement age to 68.	17%	A small reduction in benefits
6) Raise full retirement age to 69.	40%	A modest reduction in benefits
7) Cut cost of living increase by 1%/yr.	65%	Gradual benefit cuts should not bite severely for several years
8) Cut cost of living benefit by 1/2% per year.	33%	Very gradual benefit cut should not bite severely for many years
9) Index cost of living benefit to chained Consumer Price Index.	19%	Small benefit cut to a more realistic cost of living adjustment

* Note that using the chained CPI index to calculate cost of living adjustments is a procedure long advocated by many knowledgeable people about inflation adjustments. It is the most realistic known method because it takes into account that people change their behavior in response to changing prices. For example, if the price of apples goes up and the price of pears goes down, people will eat more pears. and fewer apples. Using the chained CPI would lead to a somewhat smaller cost of living adjustment but not as much smaller as a 1% or 1/2% annual reduction in adjustments.

Let us now look at some combinations of changes that will solve the problem.

Combination #1
Possible Action	Percent of Needed $	Burden Borne By
2) Eliminate the tax cap for salaries above $400K leaving a “doughnut hole” between $160k and 400K.	71%	Salaries above $400K
3) Raise Social Security tax 1% (0.5% on employer and 0.5% on employee).	30%	Small tax increase on employer and employee
Total % of Needed $	101%

Combination #2
Possible Action	Percent of Needed $	Burden Borne By
7) Cut cost of living increase by 1%/yr.	65%	Gradual benefit cuts should not bite severely for several years
6) Raise full retirement age to 69.	40%	A modest reduction in benefits
Total % of Needed $	105%