Modest changes could solve crisis for Social Security

Sue Ward, left, of Upper Marlboro, Md., and a member of the National Committee to Preserve Social Security and Medicare, joins members of Congress and union members last year outside the Capitol to voice their opposition to potential cuts in Medicare, Medicaid, and Social Security benefits as Congress looks for ways to reduce government spending in all areas, on Capitol Hill in Washington.

WASHINGTON -- 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.

Other 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 interest groups.

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

Social Security's finances are being hit by a wave of demographics as millions of Baby Boomers reach retirement, leaving relatively fewer workers 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 collected more in taxes from workers than it paid in benefits. But trustees project that the surplus, valued at $2.7 trillion, will be gone in 2033.

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

Data from the Social Security Administration was used to calculate how much of the shortfall would be eliminated by various options. To show how Social Security's long-term finances have become worse in the last two years, here is the share of the shortfall that would have been erased if the options had been adopted in 2010.

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.

Increase the payroll tax by 0.1 percentage point a year, until it reaches 14.4 percent in 20 years. Then workers making $50,000 a year would get a tax increase of $500 and employers would have to match it. This would eliminate 53 percent of the shortfall. Two years ago, it would have wiped out 73 percent.

Retirement age

Workers qualify for full retirement benefits at age 66, a threshold that gradually rises to 67 for those born in 1960 or later. Workers are eligible for early retirement at 62, though monthly benefits are reduced by about 25 percent.

Options:

Gradually raise the full retirement age to 68 in 2033. This would eliminate 15 percent of the shortfall. Two years ago, it would have eliminated a little more than 20 percent.

Gradually raise the full retirement age to 69 in 2039 and 70 in 2063. This would eliminate 37 percent of the shortfall.

Two years ago, it would have erased about half.

Benefits

Initial Social Security benefits are determined by lifetime wages, meaning the more you make, the higher your benefit, to a point. The average monthly benefit for a new retiree is $1,264.

Option: Change the calculation for initial benefits, but only for those with lifetime wages above the national average, about $42,000 a year. This option would wipe out 34 percent of the shortfall. Two years ago, it would have erased almost half.