How I'd fix Social Security

Social Security’s finances have turned into a total mess. If nothing is done, Social Security’s trust fund will run out of money in about 10 years, which would force the program that’s a major source of financial support for people in their 60s and up to cut benefits by more than 20%.

Given how important Social Security is and how risky it is for any individual politician to propose modifying its benefits in any way, the only way to fix its financial problem is through a bipartisan solution. That’s what happened in the 1980s when the program was close to running out of money.

However, with political divisiveness in Washington continuing to grow—on full display during President Biden's State of the Union address last night—and with Social Security still able to meet its obligations for another decade or so, a quick bipartisan solution seems about as likely to happen as solving the problem by getting money to fall from the heavens directly into Social Security’s coffers.

But when both parties are finally forced to get together and act like grownups rather than snitty children, we’ll end up with fixes that will likely both increase the program’s revenues and probably reduce its future costs, as well.

There’s just no other way to restore Social Security to something resembling solvency. So let me give you an idea of what to expect. In addition, I’ll offer two ideas that don’t seem to be under serious consideration now but would be very helpful if they somehow got adopted.

First, a little history lesson. When Social Security had shortfall problems in the early 1980s, Congress and President Ronald Reagan created the National Commission on Social Security Reform in 1981. This bipartisan body became known as the Greenspan Commission because it was chaired by Alan Greenspan, who later became chairman of the Federal Reserve Board.

In its report, issued in 1983, the Greenspan Commission proposed various ways to bolster the system, including subjecting some benefits to federal income tax, gradually raising the age at which people would qualify for full retirement benefits, and various other tweaks.

What’s likely to happen this time around is something similar: a combination of higher taxes on wage earners to help fund the system, and a decrease of some sort in future benefits below where they’d otherwise be.

As things stand now, employees pay Social Security tax of 6.2% of their earnings up to $160,200 a year, and employers match that. The maximum amount of earnings subject to Social Security tax is adjusted every year to keep up with inflation.

Economists assume that although employers pay half the Social Security tax, that money in effect is coming from employees who’d otherwise be getting higher salaries, bigger benefits or both. So. we’ll say that individuals earning up to the limit are paying a 12.4% Social Security tax.

You can expect any fix to increase the amount of salary subject to the 12.4% tax by tweaking the formula used to calculate the wage cap. There are proposals to remove the wage cap totally, which would add 12.4% to the tax rate of the highest-paid people. But It’s hard to see that happening because it would enrage many of the highest-paid people in the country. Who, of course, have disproportionate political influence.

Another possibility is to gradually increase the retirement age for full benefits, currently 67 to people born in 1960 or later, to 68 or 69 over a period of years. That would reduce future benefit costs by having benefits paid for fewer years. It’s not something that I’d like to see happen, but raising full retirement age could well be part of any bipartisan deal.

I think an interesting approach to shore up Social Security would be to subject some but not all investment income—dividends and capital gains—of very-high-income people to a 6.2% Social Security tax.

It’s an idea that I got from talking with Prof. Teresa Ghilarducci, a retirement expert who teaches at the New School for Social Research in New York. (She’d like to tax all capital income earned by the likes of Elon Musk, but that doesn’t seem to have much of a chance of happening.)

Another interesting idea would be to increase the amount of salary on which employers pay the 6.2% tax, but not to subject employees to that increase. That way, the increased tax wouldn’t reduce peoples’ take-home pay even though it might be coming out of their pockets indirectly.

The Social Security Administration, which keeps track of proposed Social Security fixes on its website https://www.ssa.gov/oact/solvency/provisions/payrolltax.html lists about three dozen proposed fixes, some of which involve taxing investment income.

We should remember that even if a bipartisan solution comes to pass, it may not fix Social Security’s problems permanently, any more than the Greenspan Commission did.

The commission, created just a few years after the government approved 401(k) retirement accounts, made some overly-optimistic assumptions, Ghilarducci says.

“Back in 1983,” Ghilarducci told me, “401(k)s—the bright new [program] just five years old—were going to fill in for the Social Security benefit cuts, and so was working longer.”

Ghilarducci added: “But we have run that 40-year experiment and still half of all workers have nothing but Social Security to rely on in old age, and seniors are the fastest-growing group of the working poor. Senior poverty rates went up last year when everyone else’s went down.”

I don’t know when Social Security will finally get fixed—or at least better. But please keep the history lesson from Ghilarducci in mind. To wit—that whatever fixes get made to the system are better financially than no fixes at all. And that, at some point, we’ll have to fix it once again.

Allan Sloan, who has written about business for more than 50 years, is a seven-time winner of the Gerald Loeb Award, business journalism’s highest honor. He’s won Loebs in four different categories over four different decades.

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