"If it ain't broke, don't fix it." For 58 million Americans, the Social Security system works satisfactorily. Therefore, many were surprised when President Obama suggested a fix, using the chained CPI for the cost-of-living adjustment. What's wrong with the Social Security system?
Obama's concerned because the Social Security trust fund is being depleted. From 1984 to 2009, the trust fund grew when the amount paid in exceeded the amount of benefits paid. Then the situation reversed and the fund began to diminish -- at the end of 2012 the balance was $2.735 trillion. Recently, the Congressional Research Service reported, "the Social Security Board of Trustees released its latest projections showing that the trust funds will be exhausted by 2033 and that an estimated 75 percent of scheduled benefits will be payable with incoming receipts at that time."
The root cause is demographics. During the first half of the twentieth century, the U.S. population was actuarially young, due to "relatively high fertility, declining infant and childhood mortality, and high rates of net immigration to the United States by young workers and families." Since 1950 this trend has changed. By 2040, 20 percent of Americans will be age 65 or older -- 80 million folks. (15 million will be 85 or older.) The Congressional Research Service observed, "Between 2010 and 2030, the number of people aged 65 and older is projected to increase by 77 percent."
Meanwhile, "The number of workers supporting each Social Security beneficiary is projected to decline from 2.9 in 2011 to 2.0 in 2035." The era of a "pay as you go" Social Security system is over. By 2033 America needs to do something to bolster the Social Security trust fund or it won't fully meet its obligations.
Four generic solutions have been proposed. The most popular is raising the ceiling on income subject to the Social Security tax. In February, the Congressional Research Service evaluated several options for raising the ceiling and observed:
Raising the ceiling would greatly extend the life of the Social Security trust fund. However, this change is opposed by "high-wage workers" and Republicans, who consider it a tax increase.
Although the maximum taxable limit is updated annually in response to increases in average wages, the proportion of covered earnings subject to the payroll tax is not constant -- it has fallen since 1983. A primary reason is an increase in wage inequality. Wages have become more unequally distributed since the early 1980s, mostly due to wage gains at the top of the income distribution. Consequently, a larger share of earnings of high-wage workers will be above the maximum taxable limit. [Emphasis added]
A second solution is changing how Social Security trust funds are invested. Currently, they are invested "in securities guaranteed to both principal and interest by the federal government." The Center for American Progress suggested increasing the life of the trust fund by shifting "a 25-percent portion of the trust funds' assets into corporate securities" to improved the yield. While supported by economists, this notion has not been given serious consideration on Capitol Hill.
A third solution is raising the retirement age. In 1983, Congress increased the Social Security full retirement age from 65 to 67 (phased in over a twenty-two-year period beginning in 2000). The 2010 Simpson-Bowles Commission recommended further increasing the retirement age to 69. This acknowledges that since 1940, when Social Security was enacted, worker life expectancy has increased by almost 20 years. However, opponents note that racial minorities and workers in physically demanding occupations are not living longer.
The fourth solution is changing the method used for the cost-of-living adjustment. Each year Social Security benefits are adjusted to reflect inflation as measured by the Bureau of Labor Statistics' Consumer Price Index. In 2002, the Bureau of Labor Statistics introduced an additional index, the chained CPI, which some say is a more accurate reflection of inflation. In his 2014 budget, President Obama proposed adopting this for Social Security.
The Budget contains the President's compromise offer to Speaker Boehner from December. As part of that offer, the President was willing to accept Republican proposals to switch to the chained CPI. But, the Budget makes clear that the openness to chained CPI depends on two conditions. The President is open to switching to the chained CPI only if: The change is part of a balanced deficit reduction package that includes substantial revenue raised through tax reform. [And] It is coupled with measures to protect the vulnerable and avoid increasing poverty and hardship.
Most observers agree that the president's proposal is not meant as a comprehensive effort to fix Social Security but rather to achieve political objectives. Many believe the president's proposal will penalize the most needy Social Security recipients, those who are already underserved by the program.
Nonetheless, it's clear that while the Social Security system currently "ain't broke" it will soon need repair. Who is going to fix it?