Cures for What Ails Social Security?Part Two of Two

Social Security has been redesigned many times, but almost every serious proposal for fixing it eventually reaches the same short list of choices.

Collect more money. Pay less than currently scheduled. Start benefits later. Change how benefits grow. Invest the money differently. Or combine several of them.

The 1983 reforms did that. Congress increased revenue, changed taxation of benefits, delayed cost-of-living increases, and gradually raised the full retirement age. It was neither a pure tax solution nor a pure benefit-cut solution.

Proposals tend to become less complicated when run through a political meat grinder.

One argument says the problem could be solved largely by taxing more wages of higher-income workers. There is real money there, and several bills introduced in Congress would expand the amount of earnings subject to Social Security taxes. But proposals differ on an important question: if someone pays considerably more into Social Security, should that worker also receive a larger benefit? Raise taxes and raise benefits simultaneously, and some of the financing improvement disappears.

The opposite argument promises that taxes need not rise if we simply restructure benefits, raise retirement ages or privatize some portion of Social Security.

Those ideas provide no actuarial free lunch either.

Stocks have produced higher long-term returns than Treasury securities. That makes investment reform worthy of discussion. But moving Social Security money into individual market accounts doesn’t erase benefits already promised to today’s retirees and workers. Payroll taxes currently coming in are largely being used to pay benefits going out. Divert some of those taxes into private accounts and someone still must finance the existing checks.

Then there is market risk. Social Security owes benefits in March of 2009 just as certainly as in March of 2026. Markets don’t coordinate bear markets with monthly Social Security benefit checks. Congressional Budget Office research on privatization has found potential long-run economic benefits under some designs, but also transition costs, losses for some generations and reduced risk sharing.

The same problem appears in reverse when someone promises that benefits can never be reduced. If every scheduled benefit is protected, the shortfall must eventually be financed by workers, employers, other taxpayers, borrowing or some combination.

One seldom-discussed complication is that Social Security isn’t economically the same benefit for every recipient.

Social Security’s own data say benefits represent roughly 31% of income for people over 65. Among beneficiaries 65 and older, however, about 12% of men and 15% of women receive 90% or more of their income from Social Security.

For one household, Social Security is the money that pays for groceries. For another, it supplements an investment portfolio. Both receive benefits under the same formula.

The Trustees can calculate the funding gap but won’t tell us who should bear it. That isn’t an actuarial decision but a policy choice and political hot potato hiding inside nearly every proposed Social Security solution. And political collaboration is in short supply.