How the experts would fix Social Security if they had their way

When it comes to Social Security, the question on most people’s lips is: “Will it still be there for me when I retire?”

The answer is generally yes. But the system will pay less in benefits if nothing is done to repair it.

In April, the Social Security Administration said that the program’s trust funds will be depleted in 2035. At that time, only about 80% of promised benefits will be payable. That estimate adds one year to previous projections.

It’s a problem that will require either higher taxes, lower benefits or a combination of both to repair the long-term deficit.

“There is no silver bullet,” Alicia Munnell, director of the Center for Retirement Research at Boston College, wrote in a May research report.

Top Democratic presidential candidates have come up with their own proposals to fix the program.

Meanwhile, researchers who have spent countless hours researching Social Security have their own ideas for how to shore it up.

Today’s retirees often face an uphill financial battle.

In fact, many individuals approaching retirement have less than $150,000 saved in their retirement accounts. What’s more, half of workers do not have access to a 401(k) or other workplace retirement plan at all.

Meanwhile, traditional pensions, a once common employer-provided retirement income stream, have largely become extinct for most workers.

“There’s not a lot of resources for people other than Social Security,” Munnell said.

Consequently, Munnell is a proponent of preserving today’s Social Security program, while making some key changes to it.

“I am a big fan of Social Security,” Munnell said. “It’s the backbone of the retirement system, and it’s valuable to everybody. It’s valuable to low income people, and it’s valuable to middle income people.”

Munnell is opposed to one solution that often comes up in discussions: cutting benefits. That includes raising the retirement age, which would, in turn, reduce how much money individuals can get at age 62 and up.

No benefits cuts means taxes would have to go up, Munnell said.

Because raising payroll taxes hits low earners hardest, raising the income thresholds for how those taxes are applied should also be considered, she said.

Munnell is not the only one who wants to preserve benefits and raise taxes. The Social Security 2100 Act, a current proposal before Congress, calls for similar changes in an effort to make the program solvent through the year 2100.

That bill, put forward by Rep. John Larson, D-Conn., would phase in higher payroll taxes for workers and employers to 14.8% from 12.4% by 2043.

The measure also calls for applying Social Security taxes to wages over $400,000. Currently, only wages up to $132,900 are taxed.

Those levies would make room for a benefits increase, to the tune of 2% of the average benefit.

“I like it,” Munnell said of the bill. “I’m not saying you have to do every single thing precisely the way it has been formulated.

“It’s basically a proposal that is designed to maintain the current level of benefits with a few enhancements,” she said.

Laurence Kotlikoff, an economics professor at Boston University, sees Social Security as a patchwork of rules that has been cobbled together since the program was established in 1935.

The best way to fix it, he said, is to start over with a clean slate.

“The biggest problem is $43 trillion in unfunded red ink,” Kotlikoff said of the system’s long-term unfunded liability. “And then the other major problem is the system is outmoded, it’s inefficient, it’s unfair and it’s sexist in many ways.”

Kotlikoff proposes a series of changes to the current system, which are inspired by a conversation he had with fellow economist Jeffrey Sachs, a professor at Columbia University, in the 1990s.

“This is what we would do if we had a team of economists sit down and say, ‘How should we fix the system?'” Kotlikoff said.

The plan would start by freezing the current system in place. Retirees would continue to receive payments, and current workers would be paid what they have accrued up until now.

Then, the system would shift to personal security accounts for workers. Each worker would be required to contribute 8% of their wages to those accounts.

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If they are married, 50% of those contributions would go to their spouse’s accounts.

In order to make sure everyone receives adequate payments, the government would match contributions to the accounts for poor, disabled or unemployed workers.

The money in the personal savings accounts would be invested in the global market weighted index funds. But since those investments would be made through a single government entity, the investments would come with zero costs.

By the time workers reach 57, their accounts would at least equal what they’ve put in, adjusted for inflation, Kotlikoff said. Between the ages of 57 and 67, those assets would be gradually sold off into inflation indexed bonds.

The benefits would be paid based on age cohorts. So if more people live or die within a certain age group, that would affect how their benefit payments rise or fall.

“It would adjust through time, and it wouldn’t leave any liability to another generation,” Kotlikoff said. “So the idea of stealing from generation to generation, which is what we have been doing, would end.”

When the Heritage Foundation, a conservative think tank, looked at what would put Americans on better financial footing, they included the changes proposed in the Social Security 2100 Act.

They concluded that a different strategy, however — one that’s not currently on the table, politically speaking — should win out.

That would be moving toward a more universal benefit, which would level out how much individuals receive from the system.

It would increase payments for people who are receiving checks today and are below the federal poverty level, according to Rachel Greszler, research fellow at the Heritage Foundation.

At the same time, it would also trim benefits for middle- and higher-income workers, she said.

“If you slowly move towards a flat universal benefit over time, you can reduce the size of the program and make it more targeted,” Greszler said.

The transition to a universal benefit would have to be gradual, Greszler said. Individuals who are in their 50s or 60s today would likely receive what Social Security is scheduled to pay them. Younger workers would receive benefits on a sliding scale until the transition is complete.

“It would take decades to achieve that,” Greszler said.

Once the plan is in place, it would come with a tax cut for workers. Currently, workers and employers are subject to a 12.4% payroll tax for Social Security.

Reducing that to 10%, for example, would put an extra $2,400 in the pocket of the average earner making $50,000, Greszler said.

That would be money that could go toward saving for retirement, buying a home or paying college.

Ultimately, the onus would be on workers to put that money to good use and invest it wisely.

However, they would still be in a better position than handing that money over to the government, she said, an approach that gives them a zero return on their money and shrunken purchasing power due to inflation.

“Your future benefits are only as good as Congress’ willingness to extract extra money from taxpayers in the future,” Greszler said.

Letting Americans keep more of their money would also help inspire them to work more. “Then the economy is larger, and that just cycles in the right direction,” Greszler said.