Regardless of the phrases one uses to characterize Social Security, nearly everyone agrees that the program is broken. If no changes are made to the system, benefits will immediately be slashed by 23 percent in 2036 when the program officially runs out of money to fund promised benefits.39 Such an outcome would be a disaster. Sensible reforms to the system must be made to ensure that future generations of retirees can rely upon Social Security's safety net just as their parents and grandparents did. Social Security is a vital safety net that has protected millions of retirees for several generations, but the safety net is beginning to fray.
The financial problems facing Social Security have been well-documented by the Trustees of the program. Vastly different demographics compared to when Social Security was first created are largely responsible for the $17.9 trillion in unfunded liabilities of the program.40 In 1945, there were 42 workers per Social Security beneficiary. Today there are barely 3 workers per beneficiary, and by 2060 that number will dwindle to only 2.41 Thanks to amazing medical advances made over the last 75 years, Americans are living much longer than they used to. Total life expectancy from birth in 1940 was 61 years for men and 65 years for women.42 As of 2010, those numbers had increased to 76 years for men and 80 years for women.43 But because the wonderful increases in life expectancy have not been matched by gradual and phased-in increases in the full retirement age for Social Security benefits, the program has experienced greater financial strain.
Constant raids on the Social Security trust fund by Washington have also worsened Social Security's financial position. For decades the program collected more in revenues from the payroll tax than it disbursed to Social Security recipients. Instead of safely storing that money away for future retirees or giving American taxpayers ownership of their contributions to the Social Security system lawmakers raided the trust fund to pay for their own pet projects.
Social Security Reform Principles
Social Security reform that makes the program sustainable for the long-term should follow three simple principles:
* Preserve benefits for current and near-term retirees,
* Stop the raids on the Social Security trust fund, and
* Give younger workers a true ownership stake in their contributions to Social Security.
Preserve Benefits for Current and Near-Term Social Security Beneficiaries
The U.S. government must honor its commitments to current senior citizens receiving benefits from Social Security and those rapidly approaching retirement. Hard-working Americans who made retirement plans years ago based on promises made to them about benefits available today do not deserve to have the rug yanked out from under them.
Protect the Social Security Trust Fund
When the Social Security system collects more in receipts than it pays out in benefits, the surplus funds should be off-limits to Washington politicians. The current Social Security trust fund balance of over $2.6 trillion represents each and every dollar pilfered from Social Security by spendthrift Washington politicians who treated the program as their own personal piggy banks.
The concept of protecting trust fund assets from being used for other purposes is not new. The federal Highway Trust Fund is the model for how to protect funds in a pay-as-you-go system from being used for unrelated purposes. There is no reason for federal highways to have greater protections than Social Security beneficiaries. To protect the integrity of the Social Security system program going forward, the trust fund raids must be stopped forever.
Give Younger Workers the Opportunity to Own Their Social Security Contributions
The best way to prevent Congress from stealing money from the Social Security trust fund is to allow young Americans to contribute a portion of their earnings to an account with their names on it -- a personal retirement account that can never be raided by Washington politicians. Young workers deserve the opportunity to have ownership of their Social Security contributions, to seek a market rate of return if they so choose, and to leave their retirement savings to their dependents when they die. When individual Americans have ownership of their Social Security contributions, their benefits cannot be held hostage or used as bargaining chips by Washington politicians who cannot figure how to pass a budget or keep the government running.
Gradually Increase the Full Retirement Age Due to Longevity Increases
Thanks to marvelous innovations in medical care since Social Security was first created, Americans are now living far longer than anyone expected in the 1930′s. Average life expectancy has increased by 14 years for men and by almost 15 years for women since 1940.45 This increase in longevity has also placed a greater strain on Social Security's finance. A gradual, phased-in increase in the full retirement age, while leaving the early retirement age at 62 years, can help strengthen Social Security for future generations. There would be common-sense exceptions for those in labor-intensive jobs, such as mining.
Institute Blended Indexing to Improve the Solvency of Social Security
Under current law, Social Security benefits are paid out based on the rate of U.S. wage growth that occurred during the worker's years of employment. Changing how benefits are calculated based on a system of blended indexing would allow Social Security to grow for the next generation of Americans. Under a blended index, low-wage earners, in addition to those in or near retirement, would continue to receive the present schedule of Social Security benefits. Benefits for high-wage earners would be based on the rate of U.S. price growth that occurred during the workers' years or employment, while benefits for middle earners would be based on a combination of wage and price indexing. Because wages grow more than one percent faster than prices per year, it is estimated that blended indexing could close 70 percent of the long-term deficit of Social Security.
Allow State Employees to Opt Out of Social Security
In January of 1981, the county of Galveston, Texas, opted out of the Social Security system and enrolled its employees in a county-run plan.47 Instead of relying on Congress to protect their retirement contributions, Galveston asked financial advisors to bid on administration of the fund. Like Social Security, county employees contribute 6.2% of their earnings to the system. But unlike Social Security, members of the Galveston plan also receive a term life insurance plan worth up to $215,000. Most importantly, the Galveston plan faces no long-term unfunded liability -- it is fully funded through the contributions of its members. State employees across the country deserve the same opportunity to pursue true retirement security through plans that are not facing trillion-dollar deficits.