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Social Security fixable; changes politically tough

Sunday - 8/19/2012, 8:36pm  ET

By STEPHEN OHLEMACHER
Associated Press

WASHINGTON (AP) - Despite Social Security's long-term problems, the massive retirement and disability program could be preserved for generations to come with modest but politically difficult changes to benefits or taxes, or a combination of both.

Some options could affect people quickly, such as increasing payroll taxes or reducing annual cost-of-living adjustments for those who already get benefits. Others options, such as gradually raising the retirement age, wouldn't be felt for years but would affect millions of younger workers.

All of the options carry political risks because they have the potential to affect nearly every U.S. family while raising the ire of powerful interest groups. But the sooner changes are made, the more subtle they can be because they can be phased in slowly. Each year lawmakers wait, Social Security's financial problems loom larger and the need for bigger changes becomes greater, according to an analysis by The Associated Press.

"Certainly, in the current environment, it would be very difficult to get changes made," Social Security's commissioner, Michael J. Astrue, said in an interview. "It doesn't mean that we shouldn't try. And sometimes when you try hard things, surprising things happen."

Social Security is ensnared in the same debate over taxes and spending that has gripped Washington for years. Liberal advocates and some Democrats say benefit cuts should be off the table. Conservative activists and some Republicans say tax increases are out of the question.

Others, including a deficit commission created by President Barack Obama in 2010, have called for a combination of tax increases and cuts to future benefits, including raising the retirement age again.

Janice Durflinger of Lincoln, Neb., is still working at age 76, running computer software programs for a bank. Still, she worries that a higher retirement age would be tough on people with more physically demanding jobs.

"No matter how much you exercise, age takes its toll," Durflinger said.

But at 20, Jared Macher of Manalapan, N.J., worries that Social Security won't be around for his generation without major changes.

"My generation sees Social Security as a tax, not an investment," Macher said.

Social Security's finances are being hit by a wave of demographics as millions of baby boomers reach retirement, leaving relatively fewer workers behind to pay into the system. About 56 million people get benefits today; that is projected to grow to 91 million in 2035.

For nearly three decades Social Security produced big surpluses, collecting more in taxes from workers than it paid in benefits to retirees, disabled workers, spouses and children.

But Social Security trustees project that the surplus, now valued at $2.7 trillion, will be gone in 2033. At that point, Social Security would only collect enough tax revenue each year to pay about 75 percent of benefits, unless Congress acts.

After the surplus is spent, the gap between scheduled benefits and projected tax revenue is big.

Social Security uses a 75-year window to forecast its finances, so the projections cover the life expectancy of every worker paying into the system. Once Social Security's surplus is gone, the program is scheduled to pay out $134 trillion more in benefits than it will collect in taxes over the next 75 years, according to data from the agency. Adjusted for inflation, that's $30.5 trillion in 2012 dollars.

The options for closing the gap fall into two broad categories: cutting benefits or raising taxes. There are, however, many options within each category.

The AP used data from the Social Security Administration to calculate how much of the shortfall would be eliminated by various options. To illustrate how Social Security's long-term finances have become worse in the past two years, the AP also calculated the share of the shortfall that would have been eliminated, if the options had been adopted in 2010.

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Taxes

Social Security is financed by a 12.4 percent tax on wages. Workers pay half and their employers pay the other half. The tax is applied to the first $110,100 of a worker's wages, a level that increases each year with inflation. For 2011 and 2012, the tax rate for employees was reduced to 4.2 percent, but is scheduled to return to 6.2 percent in January.

Options:

_Apply the Social Security tax to all wages, including those above $110,100. Workers making $200,000 in wages would get a tax increase of $5,574, an amount their employers would have to match. Their future benefits would increase, too. This option would eliminate 72 percent of the shortfall. Two years ago, it would have wiped out 99 percent.

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