5 Intriguing (and Less Painful) Fixes for Social Security

×

Social SecurityThere's widespread worry about the long-term solvency of Social Security. The potential remedies we hear the most about aren't pretty: ratcheting up the age at which we can begin to collect our expected payments, reducing those expected payments, or raising the tax rate at which we all pay into the system.

Fortunately, those aren't the only options. Some more creative solutions hold a lot of promise.

Here are five creative alternative solutions that have been proposed:

1. Raise (or eliminate!) the income limit for the payroll tax. Right now, any income you earn above roughly $110,000 is not taxed for Social Security. So those earning $50,000 or $80,000 face a sizable tax hit, proportionally speaking, while those earning, say, $300,000 or $3 million are only taxed on a small portion of their earnings. Taxing more of the income generated by wealthier Americans and Social Security's coffers will fill faster. It seems fair, too: Why should most Americans have all of their income subject to the tax, while a lucky few have only a fraction of it taxed?

2. Have a means test for beneficiaries. The idea of reduced benefits is scary to the many millions who will rely on Social Security as a critical contributor to their retirement income. But what if we rethink the Social Security mission, so that it's a safety net only for those who need it, funded by all workers? In other words, benefits might only go to those who pass a means test. Yes, that means that many people who were looking forward to the program providing them some extra income in retirement might not get it -- but it would only be those who already have plenty to live on.

3. Offer customizable benefit schedules. Writing for Bloomberg News, Jerome Golden has suggested permitting retirees to decide what kind of benefit structure will serve them best. For example, someone who wants to keep working until age 75, but who will be scaling back his hours over time, would be able to set his benefits to gradually increase over time. Someone else who's most worried about the cost of long-term care might accept lower benefits in her early retirement years, letting extra funds accumulate to be available later. He explains that "this reform would not reduce the current value of anyone's promised benefits; it would only reduce the system's cash outflow in the near term, buying time for the demographics to work through the system."

4. Include more workers. A 2010 report from the Senate's Special Committee on Aging suggested, among other options, including more workers. Right now, some workers, such as state and local government employees who are covered by other plans, are not part of the system. If they were, they'd eventually draw benefits, but until then, they'd be contributing Social Security taxes. This might appeal to more people now than a decade ago, as many financially strapped governments have been looking into reducing benefits for retirees.

5. Invest assets more aggressively. The report above also offered this suggestion: Invest some of Social Security's money in more aggressive ways, such as in stocks. This could be effective, but it does add risk. It wouldn't necessarily be a lot of risk, though. After all, studies have shown that over the long haul, stocks almost always beat bonds.

Privatizing Social Security: A Red Herring

One other "creative" solution that has been raised frequently is essentially privatizing Social Security. Proponents propose letting us invest some or all of the money earmarked for us on our own, choosing the investments we want. The concept has its appeal: Sensible and effective investors could grow their ultimate payouts to levels significantly better than they would have received under the current system.

But the downsides are deeply worrying -- and the more you learn about them, the more you may favor the five potential fixes above.

For starters, as designed, Social Security offers a guaranteed income in retirement, adjusted for inflation. It's hard to beat that kind of peace of mind. Yes, investing on your own in stocks can reap rewards, but it's not without risk.

The other major problem with privatization is that most Americans are not well-equipped to manage their own investments. In 2009, a Financial Finesse survey found that :

  • 86% of employed Americans say they have no idea whether or not they are on track to retire comfortably.
  • 53% say they don't have a basic knowledge of stocks, bonds, and mutual funds.
  • 73% aren't sure if their portfolio's asset allocation makes sense, given their risk tolerance and time horizon.
  • 43% spend more than they make each month.
  • 62% don't have an emergency cash fund.
  • 23% don't pay their bills on time each month.

Given those numbers, it seems silly to suggest yanking a guaranteed safety net out from under these folks and force them to try to earn profits in the markets.

Fortunately, we're not stuck having to decide between one or two painful choices. There are many possible ways to improve the health of the Social Security program, or to close its deficits entirely. Even some of the options that sound most painful may not be as bad as they seem. For instance, requiring most Americans to delay retirement by a few years is a big deal -- but upping the Social Security tax rate from 6.2% to 7.3% would cost someone who earns $45,000 just $495 extra a year. That's not pleasant, but it's far less frightening.

So don't despair -- and don't let your representatives in Washington make poor decisions, either. Consider sharing the ideas you like with your elected representatives.


Increase your money and finance knowledge from home

Managing your Portfolio

Keeping your portfolio and financial life fit!

View Course »

Introduction to Retirement Funds

Target date funds help you maintain a long term portfolio.

View Course »

Add a Comment

*0 / 3000 Character Maximum

95 Comments

Filter by:
Mike

MOFKR
Mike, that is absolutely asinine, no matter how many times you paste it. Employers do not produce the products. They OWN the PLANT and equipment, and the workers produce the product. End of story.-----------------------------------------------------------------------------------------------------------------------------------------------------------------THEY DO OWN THE PLANT! If you had EVER studied economics 101 you would have learned that the three factors of production ( that means the 3 things it takes to produce anything ) are Land, labor, & capitol. Hence by definition if ALL 3 factors are not present then there is NO production, no producing can be done! ONLY those that bring ALL 3 factors are producers. Labor does NOT bring LAND ( plant ) or the CAPITOL. BY DEFINITION WORKERS ARE NOT PRODUCERS THEY ARE WORKERS PAID FOR BY PRODUCERS. A worker is only worth what is costs to replace them either with another worker or automation. That is the PRICE of labor is subject to the two ( only two) factors of PRICE supply & demand. Thank you for such a clear example of libtard absolute ignorance to fundamental principles of economics. This is why most libtards have been displaced (fired) from employ. Got gold?

February 05 2012 at 11:25 AM Report abuse rate up rate down Reply
Mike

MOFKER UHHHHHH!!! the sky is falling, your economic procrastinators continue to be DEAD WRONG. States do not have the authority to issue currency, and your so-called "legal tender' is just traded like it is anywhere else. There is no hyperinflation, and the only depression is the one caused by fraudulent right wing economic policy, i.e. raygundubyanomics.------------------------1 replies to MOFKER''s comment-------------------------------- Mike; Unlike individual communities, which ARE allowed to create their own currency -- as long as it is easily distinguishable from U.S. dollars -- the Constitution bans states from printing their own paper money or issuing their own currency. But it ALLOWS the states to make "gold and silver Coin a Tender in Payment of Debts." legislators who are proposing state-issued currencies, that means gold and silver are lawful said Edwin Vieira, an alternative currency proponent and attorney specializing in Constitutional law. And since gold has grown exponentially more valuable, while the U.S. dollar continues to lose ground, the notion has become increasingly appealing to state lawmakers, he said. The state gold rush: Utah became the first state to introduce its own alternative currency when Governor Gary Herbert signed a bill into law last March that recognized gold and silver coins issued by the U.S. Mint as an acceptable form of payment. Under the law, the coins -- which include American Gold and Silver Eagles -- are treated the same as U.S. dollars for tax purposes and eliminates capital gains taxes. Since the face value of some U.S.-minted gold and silver coins -- like the one-ounce, $50 American Gold Eagle coin -- is so much less than the metal value (one ounce of gold is now worth more than $1,700), the new law ALLOWS the coins to be EXCHANGED AT THEIR FULL MARKET VALUE, based on weight and fineness. GOT GOLD?

February 05 2012 at 11:24 AM Report abuse rate up rate down Reply
Mike

Worried that the Federal Reserve and the U.S. dollar ARE on the brink of collapse, more than a dozen states have proposed using their own alternative currencies of silver and gold. ---NEW YORK (CNNMoney) -- Lawmakers from 13 states, including Minnesota, Tennessee, Iowa, South Carolina and Georgia, are seeking approval from their state governments to either issue their own alternative currency or explore it as an option. Just three years ago, only three states had similar proposals in place.

"In the likely event of hyperinflation, depression, or the breakdown of the Federal Reserve, State's governmental finances and private economy will be thrown into chaos," said North Carolina Republican Representative Glen Bradley in a currency bill he introduced last year.

Unlike individual communities, which ARE allowed to create their own currency -- as long as it is easily distinguishable from U.S. dollars -- the Constitution bans states from printing their own paper money or issuing their own currency. But it ALLOWS the states to make "gold and silver Coin a Tender in Payment of Debts." GOT GOLD?

February 04 2012 at 5:25 PM Report abuse rate up rate down Reply
1 reply to Mike's comment
kesac

This is all over your head, isn't it?

February 05 2012 at 5:19 PM Report abuse rate up rate down Reply
Mike

Tehran Pushes to Ditch the US Dollar

India and Iran are negotiating deal to trade oil for gold. Does this matter, you ask? It strikes at both the value of the US dollar and today's high-tension standoff with Iran.

Officially the US & EU is Tehran must be punished for efforts to develop a nuclear weapon. Sanctions on Iran's oil exports meant to isolate Iran and depress the value of its currency to a point that the country crumbles.

Sanctions will not achieve their goals. Iran is far from isolated and its friends - like India - will stand by the oil-producing nation until the US backs down or acknowledges the real matter the American dollar as the global reserve currency.

In the 1970s a deal cemented the US dollar as the only currency to buy and sell crude oil, and from that monopoly on oil trade with the US dollar as the reserve currency for global trades in most commodities and goods. Massive demand for US dollars ensued, pushing the dollar's value up. Countries stored their excess US dollars savings in US Treasuries, giving the US government a vast pool of credit.

If the US dollar loses its position as the global reserve currency, the consequences for America are dire. The dollar's valuation stems from its lock on the oil industry - if that monopoly fades, so too will the value of the dollar. Global fiat currency relationships will change. Gold will rise. Uncertainty around paper money always bodes well for gold, and these are uncertain days indeed.

GOT GOLD?

February 03 2012 at 5:27 PM Report abuse rate up rate down Reply
Mike

MOFKR
The difference between UNION workers and NONUNION workers is that union workers get a little more of what they produce, and get robbed a little less. But because they do that, and because they fight for the betterment of ALL workers, EVERYONE who works for a living benefits from the unions.---------------------------------------------------------------------------------------------------------workers do NOT produce their employers are the producers. Workers are an expense and largely replaceable with automation. Further proof if your a PRODUCER then why are you NOT out in the market directly with your OWN company? Because you do not have and /or willing to put all three factors of PRODUCTION at risk, Your Land (purchased or rented) labor, and CAPITAL. Takes all three factors put at risk AND fully funded by the individual to be a producer. You have severely over valued yourself. This is why most libtards have been thrown into the street (fired ). Got gold?

February 03 2012 at 5:26 PM Report abuse rate up rate down Reply
Mike

There is NO soc sec “FUND“, never has been. It all went to the general fund TITLED as FICA TAX and has been spent. All taxes going into the general fund is just a tax no matter what misconception the name attached. To bad so sad you got shafted by the political class, all of them. Got gold?

February 03 2012 at 5:24 PM Report abuse rate up rate down Reply
Mike

MOFKR
Mike, that is absolutely asinine, no matter how many times you paste it. Employers do not produce the products. They OWN the PLANT and equipment, and the workers produce the product. End of story.-----------------------------------------------------------------------------------------------------------------------------------------------------------------THEY DO OWN THE PLANT! If you had EVER studied economics 101 you would have learned that the three factors of production ( that means the 3 things it takes to produce anything ) are Land, labor, & capitol. Hence by definition if ALL 3 factors are not present then there is NO production, no producing can be done! ONLY those that bring ALL 3 factors are producers. Labor does NOT bring LAND ( plant ) or the CAPITOL. BY DEFINITION WORKERS ARE NOT PRODUCERS THEY ARE WORKERS PAID FOR BY PRODUCERS. A worker is only worth what is costs to replace them either with another worker or automation. That is the PRICE of labor is subject to the two ( only two) factors of PRICE supply & demand. Thank you for such a clear example of libtard absolute ignorance to fundamental principles of economics. This is why most libtards have been displaced (fired) from employ. Got gold?

February 03 2012 at 5:24 PM Report abuse rate up rate down Reply
1 reply to Mike's comment
kernershort

I think you mean "capital". The Capitol Building is in Washington.

February 03 2012 at 5:57 PM Report abuse rate up rate down Reply
tgaj

IF YOU DID NOT PAY INTO IT..............YOU DONOT RECEIVE IT........WHAT PART OF THAT DON'T THEY UNDERSTAND..............AND YES I'M TALKING ABOUT THE PEOPLE WHO COME INTO THIS COUNTRY LOOKING FOR A FREE RIDE, AND THE OTHERS THAT ARE TOO LAZY TO WORK BUT WANT TO REAP THE BENEFITS.

February 03 2012 at 11:45 AM Report abuse -1 rate up rate down Reply
1 reply to tgaj's comment
Dick Goezinya

Dude, in case you didn't know, your keyboard is broken. It seems to only type in caps.

February 03 2012 at 12:29 PM Report abuse rate up rate down Reply
savemycountry911

I hear that lib train comin. It's rollin round the bend.
I ain't seen so much stupid since I don't know when.
Obama's stuck on Socialism and the waste goes on.
We'll oust him next November and we'll send him home.
That hope and change fiasco, now it was just a lie.
When libs find out he's goin, they'll hang their heads and cry.

Tissue?

February 02 2012 at 9:43 PM Report abuse rate up rate down Reply
1 reply to savemycountry911's comment
Dick Goezinya

I get it - "lib" = liberal.

If "lib=liberal", then of course "con=conservative".

That would make you a "con-man", or perhaps you're one step above that, a "con-artist" :-)

February 03 2012 at 12:30 PM Report abuse rate up rate down Reply
1 reply to Dick Goezinya's comment
savemycountry911

Spin it all you want. It is a good song.

February 03 2012 at 3:49 PM Report abuse -1 rate up rate down
roxx

Just an interesting aside, the people that make the rules for pensions in this country are moving to a mark to market system whereby the assets of any pension plan are going to be valued at todays prices and not at what was once thought to be hundreds of per cent higher (before the last three years decimated the earnings of pension vehicles). Essentially what this means is that Companys that have not set aside enough money valued at todays rates are going to have to do so to insure that unfunded and underfunder liablilities can be paid to retirees.

Take ITT for example, its pension liabilities are 83% of its market cap and in order to pay its pensioners it will have to take write downs of the value of what it will eventually have to pay out. Even giant XOM owes pensioners many billions of dollars and will have to write those down as well. That is unless they can grow enough to grow into the value.

What caused this? Its what money will give you. And todays rate are under 1%. Your retirement account for most corporations estimated closer to 8% when they made up the pension estimates. Theres the difference. And since we are going to have almost zero rates for as long as the it takes for this economy to come back to life, assuming it ever does, none of these companys can grow enough to make up the difference.

For every one per cent change in the assumptions, the corporations would have to grow 10 to 15% to make up the difference. And that is why the SandP is so low and wont change anytime soon. Its estimated that corporations would have to grow 30% higher!! to make up the difference.

So every dime they tax you, you cannot make up in investments or savings and corporations probably wont give you in raises. They have to pay for low rates too. Or raise pension ages or cut them altogether. Sorry but these guys in Washington have done a number on everybody. And we are all going to be paying for their party for a long long time.

February 02 2012 at 8:34 PM Report abuse rate up rate down Reply