Social Security might be this country's most important social program, but it's facing a very uncertain future. According to the latest report from the Social Security Board of Trustees released last summer, the program could begin paying out more in benefits than it's generating in revenue by 2022. Just 12 years later, the $3 trillion in asset reserves held by Social Security could be completely depleted. Should this happen, the Trustees report forecasts the need for an across-the-board cut in benefits of up to 23% to sustain solvency through 2091.
The prospect of any sort of cut to benefits, let alone a steep 23%, is worrisome. However, it's even scarier when you realize that 62% of today's retirees count on Social Security to provide at least half of their monthly income. Furthermore, slightly over a third lean on the program for essentially all of their income (more than 90%). If lawmakers in Congress don't resolve Social Security's $12.5 trillion funding shortfall through 2091, we could be looking at a major surge in the elderly poverty rate in the decades to come.
These crazy Social Security solutions make more sense than you might realize
The big question is: How do we fix Social Security? To that end, there are no shortage of answers. Last year, I examined 20 possible solutions, and I'm sure I left probably a dozen more off that list. Some of the proposed fixes for Social Security make a lot of sense, while others, such as removing the payroll tax and instituting a value-added tax on consumption as Social Security's primary funding mechanism, seem like really terrible and/or crazy ideas.
Interestingly enough, though, not all of the crazy proposals are worth discarding. A few, once you dig below the surface or modify a bit, could actually make a lot of sense. Below are three oddball Social Security proposals that might actually work, if implemented.
1. Freezing the purchasing power of benefits for the rich
One idea tossed around on Capitol Hill to save Social Security money over the long run was that of eliminating benefits paid to wealthy individuals. The thinking here is that the rich aren't likely to depend on Social Security income, so why should a payment be made in the first place. Still, this isn't really fair to successful men and women who've paid into the program throughout their working careers.
But there's a middle ground solution that does make a lot of sense, even if it sounds a little odd up front: freezing the purchasing power of benefits for the wealthy.
Each year, the Social Security Administration analyzes inflation data according to a tethered index, the Consumer Price Index for Urban Wage Earners and Clerical Workers. If the price for goods and services rises by, say, 2.5% year-over-year during the third quarter (the quarter used for the year-over-year comparison), then Social Security beneficiaries can expect a 2.5% "raise" in their benefit the following year. This raise is officially known as a cost-of-living adjustment, or COLA.
Freezing the purchasing power of benefits is just a fancy way of saying that the wealthy would get no COLA once they begin taking their monthly payout. Not passing along inflationary increases to the wealthy could eliminate up to half of Social Security's cash shortfall over the next 75 years. Plus, with the wealthy unlikely to be reliant on the program, but still receiving a benefit, this middle ground solution appears to be fair.
2. Indexing the full retirement age to longevity
One of the more popular proposals by Republicans is to increase Social Security's full retirement age, or the age at which you become eligible for 100% of your benefit, as determined by your birth year. By 2022, the full retirement age will have increased to 67 years for those born in 1960 or later, and will have risen by two years over a four-decade stretch. The issue is that life expectancy has been increasing at an even faster rate, leading to retired workers receiving benefits for perhaps 20 to 30 years. Social Security was never intended to be leaned on for such an extended period of time, which is why the GOP is aiming to gradually increase the full retirement age to 68, 69, or even 70, saving the program money over the long term.
The argument against raising the full retirement age is that it harms those who can't wait by permanently reducing their payout -- benefits grow by 8% annually for each year you hold off on enrolling, beginning at age 62 and up until age 70. It also limits the ability of those who enroll after their full retirement age to boost their payout well above 100%.
This is where indexing could come into play. Indexing Social Security's full retirement age to U.S. life expectancy would allow the age where delayed-retirement credits max out (currently 70) to be fluid, giving more choice to healthier retirees without reducing their potential monthly payout. It would also work to reduce the long-term expenditures of Social Security by either reducing the payout for early claimants or paying fewer years to those who choose to wait. It may sound like a radical idea on the surface, but it makes a lot of sense.
3. Partially privatizing Social Security
The final idea, privatizing Social Security, crashed and burned in the mid-2000s, despite gaining some steam during the George W. Bush administration. Privatizing Social Security, either partially or fully, involves setting aside benefit money in a separate account that eligible workers would then be able to invest on their own. Given that the current average yield on Social Security's asset reserves is a mere 2.9%, allowing workers to invest on their own could generate beefier returns and lessen the role the government plays in propping them up during retirement.
The downside? Financial literacy in America is pretty poor, all things considered. There's the belief that lower-income workers may try to overcompensate for their respectively lower wages by being more aggressive with their investments. Should they wind up losing money, they'd be in even worse shape come retirement.
However, partially privatizing Social Security may actually make sense, as long as there are limitations on what workers could invest in. If these separate accounts were set up similar to a 401(k), where workers could invest in mutual funds, or perhaps exchange-traded funds, it could somewhat reduce volatility and the likelihood of long-term losses. At the same time, it would give workers access to the stock market, which has historically returned 7% a year, inclusive of dividend reinvestment and when adjusted for inflation. While privatizing any portion of Social Security may sound scary, it could be a smart way to reduce government reliance and increase the wealth of today's workers over the long haul.