Some in Washington refer to the Social Security system as an unsustainable "entitlement program." To the contrary, the Social Security system was designed to be a self-sustaining program funded by a payroll tax paid equally by the nation's workers and employers. Critics contend that payouts must be reduced or the system must be privatized in order to maintain program solvency. However, rather than reducing payouts or privatizing the system, one can make the case that guaranteed Social Security payments must be increased for many retirees if Americans are to be truly secure in their retirement. Here's why.
Many retirees used to depend on an employer-based defined benefit pension, Social Security, and the sale of their houses and other assets over time to support themselves. Now, most corporations have eliminated their guaranteed pensions, home values have plummeted, and the recent recession has diminished personal savings. Most private sector employees now have to plan for their own retirement with little or no help from their employer. Public sector workers in years to come likely will be challenged in the same way. This will leave most middle-income workers on their own to fund their retirement years. Most will depend heavily on Social Security and, in its current form, the system will be insufficient to meet their needs. This is not a characteristic of a secure society.
A dependable, sustainable Social Security system, capable of providing for the real needs of retirees, will require change but, in doing so, two essential features of the current system must not be lost.
First, funding Social Security through employer and employee-based payroll taxes, with payment of guaranteed monthly amounts to retirees (the "defined benefit"), must be continued. A payroll tax paid by both employer and employee, and a guaranteed payout, creates "buy-in" to, and thus support for, the system.
Second, the age at which a person can retire and receive Social Security payments must not be greatly increased. Frankly, more people may be living longer, but not all 70 year olds have the stamina, strength and mental acuity of someone in their 40s.
There are four changes that should be considered to improve the long-term sustainability of the Social Security system.
First, the cap on earnings must be eliminated. It is deplorable that the payroll tax is applied to all of the earnings of a person making, say, $50,000 a year but only the first $110,000 of the earnings of a person making far more than that amount. Perversely, this results in the higher earner paying a lesser payroll tax "rate" on all of his earnings than the lower earner.
Second, the tax rate may have to be increased for everyone. This should come as no shock. It has happened several times since 1935. The rate may have to be increased again to sustain the program.
Third, a "means test" may have to be considered whereby wealthy people receive less from the system than those dependent only on Social Security for their retirement income. This is a contentious issue but a similar strategy has already been employed in past reforms (the Windfall Elimination Tax and Government Offset Provisions). Although not without some obvious pitfalls, in theory, a system can be devised whereby the wealthy receive somewhat less from Social Security, the average participant receives some, and the least financially secure participant receives somewhat more.
Finally, a plan must be enacted to restore the amounts that, over past decades, were "borrowed" from the Social Security Trust Fund by past administrations and congresses for deficit reduction. This problem did not happen overnight and it won't be solved tomorrow but what American workers paid in was taken by government to pay for other things. It's about time that what was taken is returned to the Trust Fund, even if this must be a decades-long restoration based on general appropriations returned to the fund on an annual basis.
Eric Smith lives in Noank.