What Should Be Done To Fix Social Security?

by John A. Turner

The problem
Social Security trustees traditionally have reported on the status of the combined Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. The combined funds are projected to run out of money in 2033, less than 20 years away. Starting then, only about 75 percent of benefits will be paid if Congress does not enact financing reforms. Social Security policy in the United States is characterized by a high degree of inertia. The last major change occurred 32 years ago (in 1983), and Congress made it at the last moment, with mere weeks to spare to avert a crisis.

The fix
While a number of different options and combinations of options are available to restore solvency, I focus here on three options. The first proposal addresses congressional gridlock and is designed to maintain solvency over a 20-year period. The second and third proposals would be parts of a major reform package to restore solvency for a longer time period.

1) Deal with the gridlock in Congress. Taking a lesson from behavioral economics, Congress should pass a law involving default changes in Social Security that would automatically be enacted if it fails to act. The essential aspect of the proposal is that Congress makes a binding commitment to not let the date of Social Security insolvency be less than 15 years away. Delay is both costly and risky to Social Security participants, resulting in larger tax increases or benefit cuts than if Congress had made the changes earlier.

With this proposal, if the date of Social Security insolvency is 15 years away, Congress would be given one year in which to restore solvency for at least 20 years. If it failed to do so, solvency for the 20-year period would be restored by automatic changes that would be split evenly between benefit cuts and revenue increases. The package would involve several changes, thus minimizing the effect of any single change. Because the changes are made in advance, rather than at the last moment, and because they restore solvency for 20 years, rather than 75 years, they would be smaller than would otherwise be necessary. The benefit cuts would be reductions in the rate at which future benefits are accrued (raising the Normal Retirement Age) and a six-month freeze on cost-of-living adjustments for benefits in payment. The revenue increases would be split evenly between an increase in the payroll tax ceiling and an increase in the payroll tax rate. If Congress felt other reforms were superior, it would be the responsibility of Congress to legislate those reforms within the one-year period.

This proposal would increase public confidence in Social Security by guaranteeing by law for the first time that its solvency would be maintained. It would facilitate more timely reforms that would occur through a series of incremental changes. It would reduce the risk of Social Security as an asset in people’s wealth holdings by assuring that major changes would not be made within 15 years of retirement. This proposal draws on the experience of systems in Canada and Japan with programs that have some of its elements.

2) Raise the benefit eligibility age from 62 to 63. This proposal and the following one would be part of a package for a major reform of Social Security. People are living longer, have less physically demanding jobs, and are healthier at older ages than in the past. This proposal would raise the benefit eligibility age, but with a long delay. With this proposal, the benefits that were payable at age 62 would be payable at the new benefit eligibility age. Raising the benefit eligibility age from 62 to 63 would be done with a 10-year lead time and would be phased in over 12 years, so that it would only fully affect persons age 40 and younger (i.e., age 62 in 22 years. This change is considerably less dramatic than reverting to the standard when Social Security first started paying benefits, which was age 65. A benefit eligibility age of 63 in 22 years from now would be considerably younger than the benefit eligibility ages legislated for some other countries at that point, including the United Kingdom.

3) Add a sweetener: a longevity insurance benefit starting at age 82. A major reform of Social Security would invariably include benefit cuts and tax increases, but one or the other of these is anathema to many politicians as well as their constituencies. To make the reform more appealing to politicians and the American public, and to provide a well-targeted benefit, I propose that a new benefit, called a longevity insurance benefit, be provided starting at age 82. Social Security would be renamed as Old-Age, Survivors, and Longevity Insurance (OASLI). The benefit could be provided in different ways, but a simple way is that everyone age 82 and older receiving Social Security benefits would receive a small benefit increase at age 82 (the same amount for everyone), with the increase phased in up to age 85.

This benefit would be targeted to people who because of their advanced age would be most at risk of having outlived their 401(k) and IRA assets and depending solely on Social Security. At age 82, there are 32 percent more women than men, according to current U.S. life tables, so the benefit disproportionately helps older women, who are an economically vulnerable group. The benefit is relatively inexpensive to provide because of the advanced age at which it starts. Ireland provides a similar benefit.

Further reading:

The longevity insurance benefit and arguments for raising the benefit eligibility age are discussed in my book Longevity Policy: Facing Up to Longevity Issues Affecting Social Security, Pensions, and Older Workers, Kalamazoo, MI: W.E. Upjohn Institute for Employment Research, 2011. The policy to deal with Congressional gridlock is described in my forthcoming Upjohn Press book on Social Security Policy. For further reading on pension policy issues, visit the Pension Policy Center Web site.

John A. Turner is director of the Pension Policy Center. He has a PhD in economics from the University of Chicago.