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Since Social Security is not "bankrupt" and cannot add to the deficit, I cannot understand why Social Security has been snared by the deficit talks. Apparently Obama has offered to cut Social Security and may agree to raise the retirement age, though Social Security is more critical to more people now than ever before.
But since Social Security is mired in that mess, here is a very simple way to make Social Security solvent: remove the cap on income that is subject to SS tax.
Currently income is subject to a flat 12.4% Social Security tax but only up to about $110,000. After $110,000, income isn't subject to SS taxes. (When I was making big bucks, my checks at the end of the year were larger than usual because my income had by that point exceeded the cap and my check no longer had Social Security tax deducted.)
The Congressional Research Service (http://aging.senate.gov/crs/ss9.pdf) looked at what removing the cap would do to SS's finances. Here is what it said:
If the earnings base was completely eliminated for both employers and employees so that all earnings were taxed, 95% of the projected financial shortfall in the Social Security program would be eliminated. To achieve solvency for the full 75-year projection period under this option, the total payroll tax rate would have to be raised by an additional 0.1 percentage points (from 12.4% to 12.5%) or other policy changes would have to be made to cover the shortfall.
So eliminating the tax cap would come very close to eliminating the shortfall. Increasing the Social Security tax by 0.1 percent ($100 per $100,000 in income) would entirely fix the problem. This seems like a simple, rational fix to me.
Another option would be to adjust slightly how benefits are calculated for high income individuals. Right now, benefits are based on what one pays in to Social Security. So, the more you make, the greater your benefits are (up to the tax cap.) If the cap is removed, the high end earners would pay more tax and therefore be entitled to greater benefits.
The Report looked at the option of removing the cap and capping benefits at the $110,000 level. So, high earners would pay taxes on income over $110,000 but their benefits would be calculated as if they only made $110,000. Under that option, Social Security collects quite a bit more than it pays out. The could be lowered from 12.4% to 12.12% or benefits could be increased.
Although people at the high end need Social Security less than those at the lower end, so that makes this option plausible, I don't think it's a good idea to cap benefits. Part of the program's support is that it is an insurance program not a welfare program. But adjusting the formula for benefits on a graduated scale, could make the program solvent without even a .001% tax increase. One could do the same thing by taxing Social Security income but only for those over $110,000. This revenue could be dedicated to Social Security. Again, we could then lower the Social Security tax or increase benefits.
I prefer either of those options to increasing the retirement age. The idea is that increased life expectancy justifies increasing the retirement age. The trouble is that most life expectancy gains have been among the higher income groups -- the people that rely less, if at all, on SS. Those whose life expectancy gain is relatively small, would be the people hurt. I think that is illogical and repugnant.
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