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It is not too late to solve the problems with our Social Security system. However, changes to the system are difficult with the extreme polarization of political parties and the sensitivity of the public to the changes in Social Security. In the words of Ridge Multop, “Any change in Social Security must be bi-partisan, that is the difficulty.”⁴ It is up to the American People to force their elected representatives to create a bi-partisan solution. Only increased awareness and concern over growing budget deficits will bring change.

There are many solutions to the problem, some of which are more politically feasible than others and therefore are more likely to be adopted and supported by both the government and the people. Chances are, the formula used in the future to fix Social Security will include not just one but a combination of the possibilities listed below.

Although Americans are living longer today than they did 65 years ago, the age requirement for Social Security eligibility has not increased with life expectancy. Since 1940 the average life expectancy of Americans who reach the age of 65 has increased by over 5 years. Table 1. As the number of people over 65 expands, the government must distribute more funds to retirees further exacerbating the deficit problem.

Currently the retirement age is scheduled to increase to 67 by 2025, but this increase needs to happen at a faster rate and increase beyond the retirement age of 67. Not only would this help reduce the future deficit, but would also increase the amount of revenue collected by the government. Because people would have to work for more years they would also have to pay the payroll tax for longer periods of time. An example outlined by the Congressional Budget Office (CBO) is portrayed in Table 2-1 below. In this example, the transition to a retirement age of 67 would be sped up and then continue to increase with increases of life-expectancy. For retirees born after 1949, the age would increase by 2 months every year until the retirement age reached 70. After this point it would increase by 1 month every 2 years to account for increases in life expectency.⁵ This example would decrease Social Security payments from the projected 6.4% of GDP in 2050 to 5.6%.

Raising payroll taxes would increase revenue to pay for a portion of social security benefits. However this is a politically challenging option because no one wants an increase in their taxes. Currently the pay roll tax is 12.4%, and is shared between the employer and employee. If the tax is increased the burden would be placed primarily on the employee in the form of lower wages. This would happen because the employer would not want to pay the worker more to compensate for the tax increase; rather he/she would transfer more of the tax burden onto the employee. Therefore instead of the tax being split 50/50 between the two, it might be split 70% on the worker, and 30% on the employer. The bottom line is a raise in payroll taxes would hit the worker, more than the boss. Although revenues may increase as a result, the problem of equity, and fairness pose enormous complications.

Another option to increase revenue is to raise the taxable income cap. Currently any income made over $94,200 is not taxable. If taxes could be applied to income made above $94,200 revenues would increase, and hence Social Security entitlements would receive some additional funding. While economic theory provides no clear answer on the socially optimal trade off between equity and the cost to incentives, a modest increase could certainly boost revenues without creating detrimental disincentives.

Initial benefits are currently adjusted to account for the increase in wages over time. By switching initial benefits to be adjusted for inflation instead of wages we could effectively reduce the pace at which benefits increase over generations. Currently younger generations’ benefits give them more purchasing power than older generations had. A switch to price indexing would give future Social Security recipients the same amount of purchasing power as current recipients instead of more.

Under current law, citizens retiring after 2052 would receive 20-30% less benefits than promised by the government while citizens retiring in the next 20-30 years receive full promised benefits. This raises an issue of generational equity. Is it fair for future generations to foot an ever increasing bill created by past generations, or should all generations share equally in the cost of retirement? The CBO estimates that if benefits were cut by 10% starting with citizens retiring in 2012, the reduction of benefits for those retiring after 2052 would be dramatically less than if current law were maintained.⁶ Figure 1. Reducing benefits sooner rather than later will have a larger affect on the national debt. As shown in Figure 2, waiting until 2022 to initiate a 10% benefit cut would result in over 10% more debt than if the cut had been initiated in 2012. Ten percent of our current outstanding government debt would be approx. $450 billion (in current dollars).

President Bush has advocated for a privatized social security system. Around one third of payroll taxes (4%) – up to $1000 per year – could be diverted into private investment accounts. This plan fundamentally alters the current social security system, and will most likely reduce benefits significantly. Because this plan will not affect workers 55 or older, it creates a short-run problem. When payroll taxes are diverted to private accounts, the benefits promised to those 55 or older must be paid for in another way. To do this, the President has proposed to borrow 1-2 trillion dollars over the next 10 years.⁷

Table 1

Table 1: Life Expectancy for Social Security
Year Cohort Turned 65	Percentage of Population Surviving from Age 21 to Age 65		Average Remaining Life Expectancy for Those Surviving to Age 65
	Male	Female	Male	Female
1940 1950 1960 1970 1980 1990	53.9 56.2 60.1 63.7 67.8 72.3	60.6 65.5 71.3 76.9 80.9 83.6	12.7 13.1 13.2 13.8 14.6 15.3	14.7 16.2 17.4 18.6 19.1 19.6