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Opinion The problem with Social Security lies in its history

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October 6, 2016 at 12:30 p.m. EDT
Judy Moses, 71, prepares to be arrested during a protest in 2011 against cuts to federal safety net programs, including Social Security, Medicare and Medicaid. (Scott Olson/Getty Images)

+What should the next president do to make Social Security more sustainable?

Alicia H. Munnell is the director of the Center for Retirement Research at Boston College and the Peter F. Drucker professor of management sciences at Boston College’s Carroll School of Management. In the 1990s, Munnell served as assistant secretary of the Treasury for economic policy and as a member of the president’s Council of Economic Advisers.

Even though the future of Social Security has received little attention during this campaign, the next president will have to decide how to approach the program’s problems. Absent any legislation, the Social Security Trust Fund will be exhausted by the mid-2030s, requiring a 25 percent cut in benefits. Sensible policymakers should make changes now in order to avoid abrupt changes later.

Neither candidate has recommended cutting Social Security benefits. Indeed, several factors argue against benefit cuts. The need for retirement income is increasing because people are living longer and health-care costs are high and rising. At the same time, retirees are already receiving less from Social Security — relative to their earnings — as the retirement age gradually rises to 67; as Medicare premiums take a bigger chunk out of benefits; and as more retirees will have their benefits taxed under the personal income tax. Employer-sponsored retirement plans are also increasingly in the form of 401(k)s with very modest balances, and half the private-sector workforce does not participate in any type of employer-sponsored plan at any given time. Simply put, more and more Americans just don’t have enough for retirement.

Social Security needs to return to its anti-poverty roots

On the other hand, Social Security faces a 75-year deficit equal to 2.66 percent of workers’ covered earnings. That is, if the payroll tax rate were raised immediately by roughly 2.66 percentage points — 1.33 percentage points each for the employee and the employer — the government would be able to pay the current package of benefits for everyone who reaches retirement age at least through 2090. But raising the payroll tax, which has no deductions or exemptions, places a significant burden on low-wage workers.

In addition to raising payroll tax rates, other options exist for increasing revenue to eliminate the deficit, such as broadening the payroll tax base by including the value of employer-paid health insurance premiums or increasing the cap on taxable earnings — currently $118,500 — to cover, say, 90 percent of earnings.

Another alternative that merits some consideration is to move the cost burden associated with Social Security’s legacy debt — costs accumulated by paying benefits to earlier generations far in excess of their contributions. Soon after the program was set up in the 1930s, the first recipients were only required to pay taxes for a short period before becoming eligible for benefits. For example, the first recipient, a woman named Ida May Fuller, worked under Social Security for less than three years and ended up collecting benefits for 35 years. Many of the early beneficiaries had fought in World War I or had suffered losses in the Great Depression, so the decision may have been wise. But the cost of that decision was to forgo the buildup of a trust fund whose accumulated interest could have covered a substantial part of today’s benefits.

The question now is whether current and future workers should be asked to pay the higher payroll tax resulting from the decision to give away the trust fund, or whether they should in essence be asked to pay simply what they would have to contribute in a fully funded system. One could argue that the legacy burden should be borne by the general population, in proportion to each taxpayer’s ability to pay under the federal personal income tax. The legacy debt must be paid one way or another, but the income tax is a more equitable mechanism than the payroll tax. With the legacy debt transferred to the income tax, our current payroll taxes would cover scheduled benefits.

Read more:

C. Eugene Steuerle: Social Security needs to be fair for everyone, not just retirees

Rachel Greszler: Social Security needs to return to its anti-poverty roots