Social Security needs major changes

The good news is Americans are living longer.

The bad news is many Americans cannot afford to live longer.

Many people do not have enough money saved or in Social Security to provide sufficient income in retirement.  Of course, some are wealthy or have good employer provided retirement plans, but they are a minority.

Most people are at least vaguely aware that Social Security will not have enough funds to make its promised payments to retirees.

The main reason for the shortfall is the decreasing number of people working and contributing to the program compared with the increasing number of people eligible for its benefits.  Current payouts have always depended heavily on current payroll contributions; its trust fund alone is inadequate.

To make matters worse, the federal government has borrowed from the Social Security trust fund to meet other expenses.  In fact, it owes Social Security more than it owes the largest foreign holder of public debt, Japan, which just passed China. 

Now comes a new issue.  The forecast of how long people will live may be too short, meaning that with people living longer than expected and receiving longer payouts, Social Security will face even more problems in keeping pace with its commitments to retirees.

The federal government will struggle to find the money to make payments to retirees, and the challenge will become greater as time goes by.

Meanwhile, retirees themselves will struggle.  About 29 percent of them have less that $1,000 in savings, and 58 percent have less than $25,000.  With so little in savings to support them in retirement, they must rely on Social Security. 

Though it was not intended to be the main source of retirement benefits, Social Security provides most older beneficiaries with more than half their retirement income.  And about a quarter of married recipients and half of single beneficiaries depend on the program for at least nine-tenths of their income.

Whatever the original intent, Social Security is becoming the default pension program just when its resources are becoming inadequate. 

It all adds up.  Fewer contributors relative to recipients, tens of millions of new retirees, Social Security itself owed money, and older people increasingly dependent on it.

Political promises to “protect” Social Security are not enough.  A more comprehensive reform is needed, though it would come at a time when there is great pressure to reduce government spending not increase it.

In the end, it is likely that each of the current problems will have to be addressed.

As life expectancy is increasing, the retirement age will be raised.  It is now on course to reach 67, up from 65.  But it may need to be raised even more, especially as the forecasts on the length of life continue to put pressure on the program.

Its outlays could be cut if benefits to wealthier people were not only taxed, as they are now, but reduced or eliminated at upper retirement income levels.

The payroll tax rate paid by all, especially upper income people, could be increased.  Perhaps the way to attract enough political support for such an increase would be to allocate some of the new funds to optional investments in financial markets.  However, given the increased level of risk, the amounts invested would have to be kept relatively small.

A payroll tax increase would not be sufficient to solve the financing problem.  The debt owed to Social Security must be paid, and that will require an increase in general taxes.  This is a clear example of the problem of pushing today’s federal deficit spending onto later generations.

Payroll tax revenues could be boosted if there were more workers contributing.  Dealing with immigrants already in the country, legally or not, and a return to America’s historic more open immigration policy could produce workers contributing to Social Security as well as new customers for American products.

It also seems obvious that workers should reduce their current spending and save for their own retirements, and they should start while still young.  That would provide security and a cushion for times, like the recent recession, when pensions stagnated thanks to reduced interest rates.  Retirees made a major contribution to economic recovery.

In effect, unless Social Security turns its back on tens of millions of older people in coming decades, it will almost certainly have to become what, for many, it already is – the national retirement plan.

This conclusion and the remedies seem almost incredible.  But the problem of assisting older Americans to survive is growing and potentially catastrophic.