Politics block Social Security solutions

SocialTwist Tell-a-Friend
Stephen Ohlemacher

Prospects appear bleak for fixing Social Security’s financial problems as the government retirement insurance program celebrates its 75th anniversary.

Many Democrats adamantly oppose any cut in benefits to reduce cost, and some won’t accept a gradual increase in the retirement age — something that was done in the last overhaul in 1983. Meanwhile, Republicans say an increase in Social Security taxes is out of the question, even for the wealthy.

Unless Congress acts, Social Security’s combined retirement and disability trust funds are expected to run out of money in 2037. At that point, Social Security will collect enough in payroll taxes to cover about three-fourths of the benefits it is obligated to pay out.

The rhetoric is creating a tough environment for President Barack Obama’s bipartisan fiscal commission to come up with recommendations to improve the government’s troubled finances. Obama says everything should be on the table, and the commission’s co-chairmen — a Republican and a Democrat— have asked for civil discourse.

The commission’s proposals are due in December, after congressional elections in November.

Compromise likely

Despite the rhetoric, many experts think policymakers will eventually settle on a compromise: small cuts in future benefits coupled with small tax increases.
“You could put 10 moderates in a room, and they could come up with a package in a day that solved the long-term problem and combined tax increases and spending cuts,” said William Gale, an adviser to President George H. W. Bush’s Council of Economic Advisers and now co-director of the Tax Policy Center. “It’s not that hard to do.” Social Security’s short-term finances are being hurt by a recession that shed more than 8 million jobs, reducing revenue from the payroll taxes that support the program. Social Security’s long-term finances will be strained as the 78 million baby boomers reach retirement age — and live longer as life expectancy increases.

For the first time since the 1980s, this year Social Security is paying out more money in benefits than it collects in payroll taxes. The program is expected to post surpluses again in 2012 through 2014, but will return to permanent deficits in 2015, its trustees said in their annual report last month.

The Social Security disability program — for those under 65 but unable to work due to disability — is in even worse shape. The disability trust fund is projected to be exhausted by 2018, meaning Congress will have to act soon to address it.

Trust fund mirage

The combined programs have built up a$2.5 trillion “trust fund” over the past 25 years, brought about by collecting more revenue over that period than payouts required.

However, the trust funds, which exist in paper form in a filing cabinet in Parkersburg, W.Va., are simply bonds backed by the government’s “full faith and credit” — in effect, IOUs from one part of the government to another. The actual cash surplus has been spent by Congress over the years to fund other government programs. The government must now start borrowing money from public debt markets — adding to the federal budget deficit — or raise taxes to redeem the bonds held by the trust funds and repay that money to Social Security.

President Franklin D. Roosevelt signed the Social Security Act into law on Aug. 14, 1935. This year, more than 53 million people will receive a total of $700 billion in benefits. Retirement benefits average $1,100 a month and disabled workers get an average of $1,065.

In 75 years, 122 million people — one-fourth of the U.S. population — will be drawing benefits.

Social Security is financed by a 6.2 percent payroll tax on wages below $106,800. The tax is paid by workers and matched by employers.

Older Americans can apply for early retirement benefits, starting at age 62. They qualify for full benefits if they wait until they turn 66, a threshold that is gradually increasing to 67 for people born in 1960 or later.

Some quick fixes

Social Security would be made solvent for another 75 years if payroll taxes were increased by about 1 percentage point for both workers and employers. It would also be fixed if Congress started taxing all wages, not just those below $106,800.

About 23 percent of the shortfall would be gone if Congress gradually increased the full retirement age from 67 to 68, according to the Senate Special Committee on Aging. Nearly a third of the shortfall would disappear if it was gradually increased to 70. House Republican Leader John Boehner of Ohio recently suggested increasing the full retirement age to 70. Democrats slammed Boehner, even though House Majority Leader Steny Hoyer, D-Md., made a similar suggestion in a speech the week before.

“It’s an important program for millions of Americans, tens of millions of Americans, and if we don’t fix it, it will not be there,” Boehner said later. “I understand that these subjects get to be rather sensitive, and especially in an election year. I was not at all surprised by the attacks that came my way.”

Among the first to attack Boehner was House Speaker Nancy Pelosi, D-Calif. She was asked later if she was hamstringing Obama’s fiscal commission by publicly opposing an increase in the retirement age.

“That would be my goal, but I don’t think I have that much influence in what they do,” Pelosi said. “They are an independent commission appointed by the president. They have to do what they have to do.”

To read the report of the Senate Special Committee on Aging visit http://aging.senate. gov/ss/ssreport2010.pdf.