Social Security: Need Remains the Same

Some people claim that Social Security is outdated and should be radically altered. I disagree. The basic need for Social Security has not changed and will not change as long as people continue to be primarily dependent on wages for their support. In a wage economy the need for social insurance is universal and unending; people pay into the system while working, and when they are old or disabled, or when a working family member dies, benefits are paid out of the accumulated funds to partly replace the wages lost.

Social Security has worked extremely well for 70 years, and careful attention has been paid to estimating costs and income for the next 75 years. The 2004 Trustees' Report anticipated a 75-year deficit of 1.89 percent of payroll. (The 2005 report, issued on March 23, shows a slight increase to 1.92 percent of payroll, but the actuaries are still using the 2004 report for most purposes, since recalculating the effects of various proposals will take time and the differences will be minimal.)

The system can and should be brought fully into balance without reducing benefits (although benefit growth would be slowed somewhat by adopting a more accurate Consumer Price Index, as noted below). Benefits are already being reduced by gradually raising the age of first eligibility for full benefits from 65 to 67, and by the impact of increases in Medicare premiums, which are withheld from Social Security benefits. In my judgment, even these cuts go too far.

I propose several changes that would be desirable even if there were no long-run shortfall:

1. Gradually raise the cap on earnings so that once again 90 percent of all earnings from covered employment are taxed and counted for benefits. Congress set that goal in 1983, but because wages at higher levels have been rising faster than at lower levels, only 85 percent of covered earnings are now taxed. I favor returning to 90 percent coverage by increasing the cap by an additional 2 percent each year starting in 2006, thus reaching the goal about 2043. This change alone reduces the anticipated Social Security shortfall by 0.61 percent of payroll.

2. Beginning in 2010, dedicate a residual estate tax to Social Security. Present law gradually reduces the estate tax so that by 2009 only estates above $3.5 million are taxed, and the Bush administration wants to abolish the tax altogether in 2010. Freezing it at the 2009 level and dedicating the revenue to Social Security reduces the program's shortfall by 0.51 percent of payroll.

3. Adopt the more accurate Consumer Price Index recently developed by the Bureau of Labor Statistics to better account for the substitution of one commodity for another as prices rise. This would produce somewhat smaller Cost of Living Adjustments (COLAs), reducing the shortfall by 0.35 percent of payroll.

4. Beginning in 2010, cover all new employees of state and local governments under Social Security. About three-fourths of state and local employees are already covered; all should be. With this change almost every worker would be under Social Security, sharing the benefits and obligations of our national family protection system. Universal coverage reduces the Social Security shortfall by 0.19 percent of payroll.

5. Improve the return on Social Security funds by investing part of the funds in equities, as most public and private pension plans do. I propose gradually investing up to 20 percent of total accumulated funds in a broadly indexed equities fund. Investment in stocks is risky for individuals, who will ordinarily need the money at retirement, when stock prices may be down. In contrast, Social Security could ride out market slumps. The idea would be to build up and maintain a reserve whose earnings would help meet future costs. To avoid having to sell off part of the trust fund accumulation, I would also provide for an increase of one-half of one percent of payroll in the contribution rates of employers and employees alike at the point where the ratio of the trust fund to the cost of a year's benefits would otherwise start to decline, now estimated to be 2023. Counting all the changes, the system would be financed well beyond the traditional 75-year estimating period.

Rather than carving a system of private accounts out of Social Security, as the president proposes -- thereby undermining the system's financing and putting basic benefits at risk -- I would provide an easy way to save on top of Social Security. Workers could direct their employers to forward up to an additional 4 percent of their earnings to Social Security for investment in any of three indexed funds -- bonds, stocks, or mixed. The government would pay the administrative costs.

Social Security is doing the job it was designed to do. All it needs to ensure long-term solvency are some relatively small changes which will improve the fairness and efficiency of the system while improving its financing.