Can Social Security Be Saved?

Virtually all American workers know about Social Security, and participate in the program in some manner, most prominently through OASDI payroll taxes that are paid. In recent years there has been much debate over the long term financial health of this social insurance program. The financial health of Social Security has become the fuel of debate among politicians and talk radio hosts. There have been some attempts to insure the long term solvency of the program, but none seem to answer the key question "can Social Security be saved?" The problems and solutions to the social security question are many and diverse. There is not one simple solution to the problems faced by the Social Security program, and many have been politicized out of proportion. Social Security can be saved; however, saving it will require changes to the way the program is viewed, and operated.

To understand how Social Security is viewed, it is important to understand how it began. Social Security was developed in the nineteen-thirty's as a social insurance program to protect against the loss of income. The loss of income could be caused by death, disability, or retirement. It was designed with the basic idea that it would be self supporting, and participation would be mandatory. It is self supporting in that current taxes are used to pay for current benefits. This self supporting aspect has lead to many of the problems faced by the program today. There was no account given to the increasing life expectancy, or the "Baby Boom" generation that now threatens to strain the system to the breaking point. These original ideas may not be sufficient in the long term to sustain the program.

The Social Security program uses projections over a seventy-five year period to project income and expenses. Most people are aware that the program has projected a shortfall in income, and the ultimate collapse of the program. Much of the problem is due to the pay as you go nature of the system. Current taxes are used to pay current benefits. With the "Baby Boom" Generation reaching retirement, the system is faced with increasing benefits being paid on shrinking income. The initial shortfall in income is projected to be as soon as 2017, with the program being totally exhausted by 2040. These projected shortfalls have lead to some changes in the program, in 1983, to help keep the program solvent. Those changes were not enough to solve the long term permanent problems faced by the program. There is no easy solution to such a complex and political issue. It will never be easy to fix Social Security, but the sooner steps are taken to resolve the problems the easier it will be.

One step towards a solution will require a fundamental shift in how Social security is viewed by participants. Most view Social Security as an earned right, and it always has been. The promise of Social Security has been that workers pay for the older generation and in turn the next generation will pay for them. From its beginning Social Security has paid a benefit to all workers, their families, and beneficiaries, if the worker meets the minimum eligibility requirements. The eligibility test is working for a sufficient amount of time to be covered. This benefit is paid without regard to wealth, or other income. Changing the perception of Social Security from an earned right to a social benefit tax would be a difficult shift in perception to accomplish. By becoming a social benefit tax, some who contribute may not see a direct benefit from their contributions, or may only receive a limited benefit. One step in that direction would be to apply a means test to the benefit.

Means testing would reduce or eliminate benefits to workers based on their income or assets. If a retiree's income, or other assets exceeded a certain threshold limit the benefit would be either reduced or eliminated. This would require a fundamental shift in the program away from an earned right to a social benefit tax. This would solve the financial problem faced by the Social Security program. While this may seem like a simple solution, there are drawbacks. Means testing would be a disincentive to saving, and an incentive to spending. It would also be difficult to administer.

Another potential solution that is already in use, is an increase in the normal retirement age. From the beginning, full Social Security retirement benefits were available at age sixty-five with early benefits available at age sixty-two. In 1983 the retirement age was increased to sixty-six for workers born after 1943 and sixty-seven for workers born after 1959. If this idea were expanded, to account for increasing life expectancy, it could reduce the projected Social Security shortfall by up to two thirds. This solution in effect is a reduction of benefits, because early retirement benefits are still available at age sixty-two to all workers. For example, the benefit of a worker born in 1960 retiring at age 65 would be reduced in comparison to a worker born in 1942 retiring at the same age.

Recently, a proposed solution that has gotten much attention is the use of individual accounts. On the surface individual accounts have many benefits. Workers would have ownership and control over their accounts. Workers would be able to invest their accounts and possibly get a better rate of return on their funds than what the government is able to with Social Security funds. Would the average worker really do better in the market? Most don't have the expertise or stomach to invest in the stock market. Would the government then need to limit choices to more conservative investments, or face the potential need to "bail-out" bad investment decisions? Individual accounts sound appealing; however, how would the transition be accomplished? There is no way to immediately convert to individual accounts because of the pay as you go set up of Social Security. The only way to accomplish this solution would be to have one generation save for their personal accounts while at the same time contribute to current benefits. This is a burden that would most likely make the transition not possible to accomplish.

Can Social Security be saved? Yes, by changing how Social Security is viewed, and making the necessary changes to the program it can be saved. The solution may lie in a cultural shift, making Social Security a social benefit tax, not guaranteeing a benefit to all who contribute. Perhaps the solution is as simple as taking any action to save the program. Unfortunately, there is no perfect, or painless solution to this complex social and economic problem. Waiting until insolvency forces a decision is not a good plan. In the end the best solution may be a blend of the proposals that exist on the issue.