Social Security: Panel recommends steps to ensure solvency

By Susan Rupe

Social Security faces possible insolvency, and the Committee for Economic Development, the public policy center of The Conference Board, has sounded the alarm.

Without prompt action, Social Security’s dedicated trust fund is projected to reach insolvency in 2033. This will result in sharp decreases in benefits or increases in demands for funds from the general account of the federal budget, exacerbating the already soaring budget deficit and debt problems.

The committee issued a new solutions brief, “Saving Social Security,” which offers a series of steps to shore up the Social Security program, which is the largest component of the total federal budget and is the largest driver of long-term debt.

“Our fiscal policy cannot sustain its current dangerous and destabilizing path, and both our senior retirees and the future generations paying into Social Security deserve the leadership necessary to save and sustain the program,” the committee said in a statement.

The committee made the following recommendations for a framework of comprehensive Social Security reform.

Establish a bipartisan congressional commission

Saving Social Security needs to be part of a larger comprehensive review and reform of our overall fiscal priorities and processes which can best be accomplished under the auspices of a bipartisan congressional Commission on Fiscal Responsibility. That committee must leverage all the tools at its disposal to target a strategic goal of restoring debt to GDP to a ratio of 70%. Reforms to Social Security—which has averaged 21% of total federal outlays over the past 50 years—must be included in its scope.

Adjust Social Security benefits

Gradually raise the full retirement age to receive Social Security benefits to 69. Estimates show phasing in a one-year increase in the FRA to age 68 over 24 years closes 12% of the program’s long-term shortfall, while phasing it in over six years would close 15%. Past reforms have also shown that long phase-in periods for raising the retirement age best allow workers to plan for retirement. This also means, however, that reforms to raise FRA have smaller impacts over a 10-year horizon.
Implement modest additional means testing for high-income beneficiaries. One option to reduce higher-income benefits would be to implement means testing for Social Security benefits based on a beneficiary’s current retirement income. However, this change would not be expected to produce significant savings in the short term. Alternatively, the Social Security benefits formula could be altered to lower benefits for those with higher lifetime incomes.
Use a more accurate calculation of annual cost-of-living-adjustment to index Social Security benefits, using chained-CPI. Chained-CPI is already used for indexing many parameters of the tax system and since 2001 has grown by an average of 0.25 percentage points slower per year than traditional CPI. The American Academy of Actuaries estimates this change would cover 13% of the 10-year shortfall, while Social Security Administration projects it would close 17% of the shortfall over 75 years.
Remove work disincentives for retirees to help bring more retirees back into the workforce. Reforms also must consider how changes to Social Security payroll taxes and the structure of benefits can influence individual decisions about when to retire and how much to save for retirement. According to the Congressional Budget Office, a reduction in benefits would likely lead more older workers to work longer while also saving more for retirement. One possible approach would be to modify the Social Security retirement earnings test for those who claim benefits before reaching full retirement age. This would effectively disincentivize work for those who tap into benefits early, who are typically among the beneficiaries most in need.

Raise revenues

Gradually raise the maximum earned income subject to the payroll tax to cover 90% of earned wages from today’s 81%. Payroll tax revenues can be raised to address the program’s deficit through a number of measures, including increasing the coverage of income subject to tax.
Cover newly hired state and local workers under Social Security. These workers can currently be exempt if states maintain a similar retirement program. Including newly hired state and local employees under Social Security would have an immediate financial impact, raising $132 billion in revenues over 10 years, according to CBO.

Better invest the Social Security trust funds

Consider diversifying Social Security Trust Fund investments beyond Treasury securities, similar to the reforms implemented in the Railroad Trust Funds. According to SSA estimates, investing 40% of the old age and survivors income and disability income trust fund reserves in equities (phased in 2024–2038) and assuming a real annual rate of return on equities between 4.8% and 5.8% would close 10% to 13% of the 75-year actuarial balance.

Protect vulnerable populations of retirees

Increase the minimum benefit to protect low wage workers and those with intermittent careers. Provisions could be included to ensure minimum benefits for the lowest-income earners or those with incomplete work histories. One example would be to set a minimum level of benefits for workers meeting certain work requirements. Setting a minimum benefit at 125% of the federal poverty level for retirees with 30 years of work history would expand the total 75-year shortfall by 5%.
Ensure the schedule of reforms provides Americans approaching retirement age adequate time to adjust their retirement planning. As retirement planning is a long-term process, workers affected by reforms would benefit from advance notice to adapt. For instance, legislation passed in 1983 gradually increased the FRA from 65 to 67 over decades, with the full impact only for those born in or after 1960.

The Conference Board is a global, nonprofit think tank and business membership organization that is independent and nonpartisan.

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected]. Follow her on X @INNsusan.