Reforms Can Still Preserve Social Security

Reforms Can Still Preserve Social Security

Originally published on The Post and Courier on Mar 5, 2012

With a dose of determination and innovation, we can reform Social Security.

The recent Post and Courier editorial "Social Security insecurity" makes some important points—that Congress must reform Social Security soon to ensure its long-term solvency, and yet the current Congress is so polarized it is unlikely to make the compromises necessary to achieve such reform.

But the dire description of the solvency problem—that the retirement fund will be empty by 2037 and the disability fund kaput by 2017—may suggest to some that the system is beyond repair. It's right to raise the alarm for urgent action by Congress, but we should be careful not to suggest that we are incapable of solving the problem.

Many are under the impression that if the Social Security trust funds were exhausted all benefits would suddenly stop, but this is a misconception. Social Security is a pay-as-you-go system whereby today's benefits are paid with today's Social Security taxes.

For many years, Social Security built up a large trust fund by taking in more in taxes than it paid out in benefits in order to have enough to pay for the baby boomers to retire. As a result, the Social Security taxes collected today are no longer enough to pay all of the benefits, requiring Social Security to draw on the retirement trust fund.

If Congress did nothing to reform the system, Social Security taxes would still be enough to pay 77 percent of scheduled benefits in 2037 when the trust fund is expected to be exhausted.

If Congress decided to fund the Social Security deficit through tax increases on current workers and employers with no reduction of benefits, it would have to increase the Social Security tax by 2.22 percent under the current contribution formula. For the average worker who in 2011 earned $43,518, that would mean an annual tax increase of $483 for the wage earner and the same amount for the employer.

This is not to say that hitting American workers and their employers with a 2.22 percent tax increase is OK—because it's not.

The point is that bringing Social Security back into long-term actuarial balance is not an impossible task, particularly if action is taken soon and if both tax increases and benefit cuts are part of the equation. Even if tax increases are required, there are numerous options for increasing revenue without imposing higher payroll taxes on middle class and low income workers who are already struggling to make ends meet.

The biggest obstacle to achieving long-term solvency of the Social Security system may be our inability to look beyond tax-rate increases or benefit cuts as the only possible solutions. We should recognize that the recovery of both our economy and the wages of the middle class could drastically change the calculus of Social Security reform.

Social Security is funded by taxes on wages earned by ordinary American workers -- not on stock dividends and capital gains, which are the primary sources of income for our wealthiest citizens. Our highest wage earners pay no Social Security taxes on earnings over $110,100.

As currently designed, the burden of Social Security taxes falls squarely on the shoulders of the middle class whose real wages have declined over recent decades and who are now suffering from high unemployment.

If our economy recovers, the unemployed return to work, and middle class wages begin to rise as they did after World War II, Social Security could generate enough revenue to significantly reduce the projected deficits.

Growing our economy and restoring the prosperity of the middle class may have a bigger impact on Social Security solvency than enacting benefit cuts and tax rate increases—neither of which Americans want or should endure unless absolutely necessary.

We should continue to sound the alarm for Social Security reform. But we should also make it clear that reform is neither an impossible nor an improbable task.

Rather than give in to resignation, we instead should rely on those quintessential American traits—determination and innovation—to meet the challenges ahead.