Eight Ways To Keep Social Security Afloat

Over the next 75 years, Social Security revenues are projected to fall short of expenses by about 2 percent of payroll contributions. That gap must be closed to make the program sustainable. The following estimates of the impact of eight popular options were made by the Social Security Administration's Office of the Actuary—they vary depending on how the option is designed and implemented. For more estimates, visit the Office of the Actuary.

1. Raise the ceiling. Collect payroll taxes on 90% of all earnings.
Cuts gap: 35-50%

2. Raise the payroll tax rate and increase contributions.
Cuts gap: 50-100%

3. Raise the retirement age. Gradually increase it from 67 to 70.
Cuts gap: 20-35%

4. Adjust the COLA to reflect the true rate of inflation.
Cuts gap: 20-75%

5. Invest part of the Social Security trust fund in securities.
Cuts gap: 15-45%

6. Preserve a limited estate tax and dedicate it to Social Security.
Cuts gap: 25-30%

7. Increase taxation of benefits. Require affluent retirees to pay more.
Cuts gap: 10-15%

8. Reduce benefits for future retirees, but protect poorer recipients.
Cuts gap: 25-70%

1. Raise the ceiling
Collect payroll taxes on 90% of all earnings.
Cuts gap: 35-50%

Social Security taxes are capped—currently collected on the first $97,500 in earnings. The goal has been to tax 90% of all covered wages. But because of rising income inequality, about 16% of all earnings are exempt. (About 7% of Americans earn above the cap.) One option is to gradually get back to 90%, which would mean taxing earnings up to $150,000. Another option is to remove the ceiling entirely and tax all earnings.

Pro: Raising the cap would return us to the 90% goal and go a long way toward reducing the revenue shortfall. If we were collecting taxes on all earnings today, Social Security wouldn't face a shortfall.

Con: Raising the ceiling would weaken the traditional link between contributions and benefits, because the highest-paid wouldn't get much higher benefits. This could weaken political support for the program.

Outlook: Broad public support for raising the cap improves the odds for bipartisan action.

2. Raise the payroll tax rate
Also, increase contributions.
Cuts gap: 50-100%

We currently pay the first 6.2% of our earnings to Social Security, matched by our employer. Raising the combined rate from 12.4% to 13.4% would cut the revenue gap in half, and raising it to 14.4% would close the gap.

Pro: This is a straightforward way to strengthen Social Security for the long haul, and payroll tax rates have not been raised since 1990.

Con: The payroll tax is regressive, unfairly burdening low-wage workers the most. Also, many employers would object to having their share of taxes raised, and some might have to lay off workers.

Outlook: AARP's poll shows surprisingly strong public support among all age groups (59%), but lawmakers would be skittish.

3. Raise the retirement age
Gradually increase it from 67 to 70.
Cuts gap: 20-35%

Americans are living longer than in 1935, when Social Security's normal retirement age was set at 65. The age is now gradually being increased to 67, and some propose slowly raising it to 70.

Pro: Because we're living longer than previous generations, we should plan to work longer to support our longer retirement span.

Con: Many of us can't work to 65, let alone 70. But if we take early retirement and get reduced benefits, and then live a long time, we might end up impoverished after other income from pensions or savings runs out.

Outlook: Merits further study, but any effort to raise the age soon would trigger strong opposition.

4. Adjust the COLA
This should reflect the true rate of inflation.
Cuts gap: 20-75%

Social Security's annual cost-of-living adjustment (COLA) is intended to protect benefits against being eroded by inflation. But many experts say the consumer price index (CPI), the basis for the COLA, overstates inflation.

Pro: The COLA should reflect the cost of living as accurately as possible. If it's overstating inflation, it increases Social Security's long-term costs.

Con: A lower COLA might not accurately adjust for retirees' health care costs, and the impact of lowering it increases over time—which would especially hurt the poor and disabled.

Outlook: Mixed—legislative changes are unlikely, but the Bureau of Labor Statistics is testing a revised CPI.

5. Invest
Put part of the Social Security trust fund in securities.
Cuts gap: 15-45%

Today, Social Security revenues that aren't needed to pay current benefits are invested in low-interest government bonds. Investing some of this money in indexed funds could earn higher interest and help close the long-term funding gap.

Pro: Investing in indexed funds would be low-risk, and just about every other public or private pension fund does it. Social Security could ride out market downturns.

Con: Government should not be involved in the stock market.

Outlook: Improving as policymakers look more closely at the tradeoffs.

6. Preserve a limited estate tax
Dedicate it to Social Security.
Cuts gap: 25-30%

The estate tax has been gradually reduced since 2001 and in 2009 will be collected only on estates worth $7 million or more (for a couple). Freezing the tax at that level and dedicating the revenue to Social Security would take a big chunk out of the long-term revenue shortfall.

Pro: It's fair to tax inherited wealth for the common good. There's no justification for totally eliminating a tax on the nation's most affluent families at a time when the nation has so many needs.

Con: The estate tax is unpopular. And if a limited estate tax is retained, it should be used to help finance more urgent needs—such as Medicare.

Outlook: Critics of the estate tax campaigned effectively against it in 2001. But public opinion may be shifting.

7. Increase taxation of benefits
Require affluent retirees to pay more.
Cuts gap: 10-15%

Everyone seems to know of someone who doesn't "need" Social Security benefits in retirement. In fact, relatively few of us are that fortunate. Higher-income retirees already pay taxes on a portion of their benefits. The tax code could be changed to increase these taxes.

Pro: It's fair for Social Security to expect more help from those who—by luck or hard work—end up comfortable in retirement. Even with a small benefits tax increase, they could still afford that annual cruise. The cost of strengthening the system should be shared by recipients as well as taxpayers.

Con: It's unfair to penalize people who have paid into Social Security throughout their working years and have managed to achieve a comfortable standard of living in retirement. And depending on how the benefits increase is designed, middle-income earners could be affected.

Outlook: Possible—that is, if Congress and a future administration are willing to consider tax increases of any kind.

8. Reduce benefits for future retirees
But protect poorer recipients.
Cuts gap: 25-70%

To help close Social Security's funding gap, benefits payable to future retirees could be cut. Many scenarios are possible, such as maintaining lower-earning workers' future benefits (to help keep them out of poverty in retirement) while using various indexing or other mechanisms to trim future benefits for higher earners.

Pro: It's hard politically to fix Social Security's shortfall with revenue increases (and an increase in the retirement age) alone. The cost of strengthening the system should be shared by recipients as well as by taxpayers.

Con: With private pensions in decline, 401(k) plans and investments at risk and individual savings at dangerously low levels, more older people might end up on welfare or be forced to move in with their adult children.

Outlook: Lawmakers may start out talking about benefit cuts as necessary for a balanced approach, but the downsides loom larger as the time for action approaches.