Social Security, becoming national pension, faces crisis

Social Security is a major problem, and it needs to be fixed soon.

In 2022, just seven years from now, the program will begin eating into its reserves. When they are gone in 2034, payroll taxes won’t cover 21 percent of payments. The shortfall will grow each year.

This pending crisis means something must been done in the next few years. The next president will probably sign the law reforming the program.

Social Security payments to retirees and the disabled have always been financed by payroll contributions by employers and employees. This money goes into a federal trust fund from which the payments are made. Individuals do not have their own accounts.

A changing population, with the number of retirees growing much faster than originally planned, will cause income to be less than outlays, requiring the use of reserves. That’s because the proportion of active workers to the retired has declined.

It was impossible 80 years ago, when Social Security was developed, to forecast the underlying reasons for this change.

Medical advances have prolonged life. When the original retirement age of 65 was set, people were not expected live more than two or three years beyond that. Now lives last at least a decade longer.

Add the baby boomers, the generation born right after World War II. The birth rate had been held down by the Depression and with many men off to war, but that changed massively as the economy grew after the war. Now, the boomers are retiring.

Meanwhile, Social Security has become increasingly like a national pension plan. It provides most of the income of about two-thirds of retirees. For about a quarter of them, it is their only income. Employers are not legally required to provide pensions.

Social Security spending is not part of budget negotiations between Congress and the president. The program operates automatically to produce payments for all those who meet its eligibility requirements. That makes it one of the largest government expenditures, greater than either total defense outlays or all non-defense spending.

Most of the candidates in both parties have been coming up with their solutions. Republicans have joined Democrats in accepting that voters want Social Security to survive in something like its current form.

Candidates of both parties appear ready to deal with shortfalls by reducing payments to wealthier people. That would make Social Security even more like a progressive income tax with payment cuts as income rose. The wealthy might find payment cutbacks preferable to outright tax increases to support the program.

New Jersey Gov. Chris Christie would go so far as to eliminate payments to those making $200,000 or more, but his fellow Republicans and Democrats won’t buy that.

Other ways of reducing payments, such as raising the retirement age or changing the cost-of-living adjustment, may sound appealing but produce little increased program life.

On the revenue side, the payroll tax itself could be raised. If it went up by three percent, most unlikely, Social Security would gain 53 years.

The Bush era proposal to replace Social Security with Wall Street investment accounts, still supported by Texas Sen. Ted Cruz, seems dead. The risks are too great. And simply cutting back on payments as lives grow longer could cause a strong political backlash.

A more practical way to raise money would be to tap the wealthy by removing the cap on the salaries subject to the payroll tax. If the $118,500 cap were eliminated next year, it would extend the program by 21 years. Democratic Sen. Bernie Sanders would use the extra revenues to expand the program, hardly improving its financial health.

Of course, some combination of these proposals could work. But Washington will have to keep in mind that many Americans depend on Social Security as all or most of the money they will live on for many years in retirement.

While the outlook for a new immigration policy is so embroiled in the presidential campaign that no action is expected until 2017 at the earliest, it could be a key element in the dealing long-term with the Social Security problem.

Resolving the problem of millions of undocumented workers, some paid off the books to avoid detection, plus opening the door to more legal entries could provide a major boost to the number of payroll contributors and Social Security’s yearly revenues. That would be the old- fashioned way of financing the program.

While the political campaign may focus on taxes, terrorism and tough talk on immigration, the sleeper issue could be how to fix Social Security.