Advocates call for creative ideas on Social Security

The lack of political will to address a looming Social Security funding crisis is prompting some people to get creative with ideas for making the system last longer or having the private sector be more involved.

"A major reform should focus on retirement security writ large," said Shai Akabas, director of economic policy at the Bipartisan Policy Center in Washington. After a special commission formed by the center spent 2014 and 2015 looking at the U.S. retirement system, "the main lesson I learned is that a Social Security package full of benefit cuts and tax increases will be almost impossible to sell," Mr. Akabas said.

Increasing benefits for vulnerable populations and improving other elements of the American retirement system, including defined contribution accounts, lifetime income options and tax credits, among other ideas, "provides a much more attractive narrative and it will also produce better results by looking at the system holistically," he said.

The crisis is real.

By 2021, the Social Security trust funds for retirement and disability insurance will begin drawing down assets to pay benefits. The trust funds will be out of money by 2034. At that point, Social Security revenue will only cover 77% of ​ benefits promised, gradually decreasing to 73% by 2091. Over the next 75 years, Social Security will owe $12 trillion more than it is projected to take in, according to the latest trustees' annual report issued in July.

That means all Social Security recipients at the time of insolvency will get 23% less, or the payroll taxes split between workers and employers to fund it would have to immediately increase to an estimated 15.2% from the current 12.4% of payroll.

Under the middle path of several scenarios modeled by Social Security actuaries in the report, payroll taxes will hit 17% in 2037 and stay there for several decades, before going higher.

Actuaries and lay people alike know the main culprits are the record number of baby boomers retiring now or soon, with fewer young people to take their place in the workforce and pay those taxes.

Unless current tax revenue increases, an exhausted the trust fund also means that when it comes to income replacement in retirement — measuring Social Security benefits as a portion of pre-retirement earnings — rates for a typical 65-year-old worker will drop to 27% by 2090 from 39% today and 36% in 2027, when the full retirement age increases to 67, as dictated by the 1983 reforms.

The solutions being floated so far by the few members of Congress willing to take on the issue illustrate the political divide.

Rep. Sam Johnson, R-Texas, who chairs the House Ways and Means Subcommittee on Social Security, has proposed to match benefit payments to revenue by cutting benefits three ways: raising the full retirement age to 69, trimming benefit levels for higher-income people, and imposing smaller cost-of-living adjustments for all, with none for people who now earn more than $85,000.

Rep. John Larson, D-Conn., the subcommittee's ranking Democrat, would keep, and even slightly improve, benefit formulas while getting the trust funds solvent by raising revenue, including increasing the current 12.4% payroll tax by 0.1 percentage point per year until 2042, when it would stop at 14.8%. His proposal would also raise the taxable maximum of $127,200, with even higher levels for people earning $400,000 or more.

Yet, as Mr. Akabas of the Bipartisan Policy Center noted: "The only way we're going to get a fix anytime soon is if it's done on a bipartisan basis. As we've seen from prior experiences, if there's not broad buy-in, the attack ads are just too easy to write."

Retirement advocates beat the drum that it is easier to fix Social Security sooner than when insolvency is here, "but the reality is, that's not true," said Andrew Biggs, a resident scholar at the American Enterprise Institute in Washington who worked on Social Security reform ideas during the administration of President George W. Bush. "It's not easier for the person in office to make that decision. The easier thing is to pass the buck."

Tired of waiting for Washington, AARP in 2016 launched an Innovation Challenge to solicit ideas for improving Social Security, and worked with the Urban Institute to assess the impact of the ideas.

One idea calls for mandatory add-on savings accounts that would allow people to delay claiming Social Security benefits. These START (Supplemental Transition Accounts for Retirement) accounts would be funded by employees, employers, and for low-income workers, the government.

With some resemblance to the Secure Choice programs being worked on in a handful of states, START funds would be professionally managed in a low-fee, pooled account with a board overseeing asset management decisions. Workers would have to exhaust their START accounts before claiming Social Security benefits, but could take them out in lump sums when they reach full retirement age. By the time they reach age 70, they would have to take the lump sum or roll it over to other retirement accounts.

On mandating START accounts, said Gary Koenig, vice president of financial security for AARP's Public Policy Institute and one of three authors of the START proposal, "we think that's how it works best."

Under another idea for protecting retirement income replacement rates that would harm lower-wage workers and older workers with inadequate savings, people could make voluntary "catch-up" contributions to Social Security of less than 2% of salary starting at age 40 or 3.1% at age 50.

Workers would invest in a risk-free asset yielding a 3% real return. Proponents Teresa Ghilarducci, Anthony Webb and Michael Papadopoulos from the New School for Social Research in New York and economics professor Wei Sun from Renmin University in Beijing debated the merits of a voluntary contribution vs. a mandate in their proposal.

A voluntary contribution might be more acceptable politically, but a mandate reduces the risk of opt-outs by vulnerable groups and keeps high earners in the program to make it sustainable.

A third idea presented in the AARP challenge would create lump-sum incentives to get more people to delay claiming Social Security until age 70, which only 10% of the eligible population now does, said Olivia Mitchell, professor of insurance and risk management at the Wharton School of the University of Pennsylvania in Philadelphia, and executive director of the Pension Research Council.

Another "doable" idea, MIT Professor Emeritus Peter Diamond said at the same event, is to have the Social Security trust fund borrow from the U.S. Treasury against future revenue. Republicans would support that idea and Democrats will find a way too "because the other alternative is too politically unacceptable," said Mr. Diamond, who first consulted with Congress on Social Security in 1974 and has studied pension systems all over the world.