The warning last week by Social Security Administration trustees that the system will run out of money seven years sooner than expected is drawing proposals from many quarters on how to fix it - and raising the retirement age is getting special attention.
Among the other proposals:
Increasing the payroll tax by an additional two percentage points over the next few years.
Reducing the annual Social Security cost-of-living adjustment for better-off retirees.
Reinstating IRAs for more people, at least for homemakers.
The retirement age proposal surfaced as trustees of the $378.3 billion Social Security system warned in a report issued last week the system could run out of money in 2029, seven years earlier than they had anticipated last year, and just as the youngest baby boomers will be hitting retirement age.
When Congress passed the last major Social Security reforms in 1983, the system's trustees had predicted there would be enough money in the old-age and survivors insurance and disability insurance trust funds to tide over the retirement years of all baby boomers.
Even worse, the system's trustees now project benefit payouts will exceed income earned by the trust funds in 18 years, with the gap growing to 2% of income earned by working Americans in 2020 and mushrooming to 5.67% in 2070.
The best estimate of the Social Security actuaries is the funds will peak at $2.9 trillion, instead of the $5.6 trillion they had projected just last year.
Particularly hard hit will be the middle class, which can currently expect to receive no more than 24% of their income from Social Security benefits, and whose personal savings, studies show, fall pitifully short of what they need to maintain their current standard of living in retirement.
"The numbers are beginning to deteriorate so rapidly that members of Congress can no longer rationalize this will be someone else's problem," noted Dallas L. Salisbury, president of the Washington-based Employee Benefit Research Institute.
There was more bad news last week in a Merrill Lynch, Pierce, Fenner & Smith Inc. study that showed 46 million Americans born between 1946 and 1964 face lower living standards in retirement than half of the current retirees. The study also reported the nation's savings rate was a dismal 2.9% of net national product in 1993, less than half of that in the 1950s, 1960s and 1970s. "We really need to cut back on entitlements to older people unless we intend to drown our children in taxes," said Laurence J. Kotlikoff, an economist at Boston University and an author of the Merrill Lynch study.
The Social Security system's actuaries attributed a large part of the grimmer outlook to a 1% annual growth in after-inflation wages, instead of the 1.1% previously estimated, and changes to reflect higher-than-estimated benefit payments to current retirees.
The two public trustees of the Social Security Administration - Stanford G. Ross, senior tax partner at Arnold & Porter and a former Social Security commissioner, and David M. Walker, partner at Arthur Andersen & Co., Atlanta, and former head of the Labor Department's Pension and Welfare Benefits Administration - suggest the system can be fixed if gradual changes are implemented in the near future. "However, the magnitude of those changes grows each year that action is delayed," they warned.
One member of Congress trying to urge his colleagues into fixing the Social Security system is Rep. Timothy J. Penny, D-Minn. He plans to introduce in the next few weeks a bill that, starting at the end of the decade, would raise the eligibility age for full Social Security benefits to 70. The retirement age now is 65, but is scheduled to rise to 67 by 2027 under current law.
His bill also would increase the age at which Americans would be eligible for partial retirement benefits to 67 from 62 now.
Rep. Penny's proposal is supported by some pension and Social Security experts. They include Robert Myers, chief actuary for the Social Security system from 1947 to 1970 and deputy commissioner in the early 1980s, and Dorcas R. Hardy, Social Security Commissioner between 1986 and 1989.
Rep. Penny also is floating a proposal that would provide full cost-of-living increases to the poorest 20% of the elderly, but reduce them for others.
But other experts note raising the retirement age to 70 may be at cross-purposes with overall employment trends, including huge early retirement programs adopted by corporations and the federal government. Then too, raising the retirement age for Social Security purposes would increase the inflow of money into the trust funds because Americans would be working longer, but that could result in employers and employees putting less money into private retirement programs.
What's more, as Rep. Penny admitted, the proposal has little support in Congress. "It is politically touchy. Very few people are willing to put their names on a bill that would raise the retirement age yet ensure solvency of the system," he said.
Other proposals circulating in Congress include a bill to encourage personal savings through restored tax deductibility of individual retirement accounts. The proposal, introduced by Sen. William V. Roth Jr., R-Del., and Sen. John Breaux, D-La., also would allow homemakers to set up IRAs. Rep. J.J. Pickle, D-Texas, also plans to introduce a similar proposal soon.
This legislation, too, has uncertain prospects of becoming law. For starters, Congress reversed full deductibility of IRAs in the 1980s. The proposal also would cost the U.S. Treasury billions of tax dollars at a time when Congress is scrambling to raise revenue to cut the vast federal budget deficit.
Of course, Sen. Daniel Patrick Moynihan, D-N.Y., chairman of the Senate Finance Committee who has in the past supported benefit cuts for the rich, also is likely to weigh in heavily on any debate over Social Security. Sen. Bill Bradley, D-N.J., also has expressed recent interest in developing a national retirement policy including Social Security.
Experts warn something must be done soon to fix the broken Social Security system so the oldest baby boomers, who will begin retiring in 17 years, have enough time to prepare.
"If employers' plans are going to be called upon in a greater degree to provide (bigger) retirement income adequacy, the sooner we send out the message, the sooner they will be able to respond on a timely basis," noted Sylvester J. Schieber, director of the Wyatt Co.'s research and information center in Washington.
Mr. Schieber is in that camp of experts who advocate slicing Social Security payments to the rich by phasing in changes in the benefits formula for future retirees.
Any cuts in Social Security benefits, of course, will put greater pressure on employers' retirement plans and on personal savings to fill in the gap. Employers, Mr. Schieber warned, will need to take shrinking Social Security benefits into account when designing retirement plans for their workers.
"The first thing Congress should do is make the adjustments to Social Security so we know what the residual challenge is," he noted.
Meanwhile, Mr. Salisbury points to the middle-class squeeze between the upper class, who tend to be covered by retirement plans, and the poor, who can expect to be well provided for by Social Security, and reckons Congress likely will pass some combination of benefit cuts for the rich or make a higher share of their Social Security payments taxable.
But even as experts try to draw legislators' attention to the rapidly mounting problems of the Social Security system, it is clear lawmakers will not take up reforms until they finish overhauling the nation's health care and welfare systems. Mr. Salisbury reckons any serious discussions about overhauling Social Security are unlikely until after the 1996 presidential elections.
He may be right, judging by the reaction of one of the most powerful men in Congress on the annual report by the trustees of the Social Security system. "Our early warning system is working well and we have ample time to respond to the issues raised in the report," noted Rep. Dan Rostenkowski, D-Ill., and chairman of the House Ways and Means Committee.