Social Security: This Fix Is In (Once Washington Takes Action)

"You can always count on Americans to do the right thing--after they've tried everything else."

That quote, often incorrectly ascribed to Winston Churchill, sums up what's happening with the Social Security Trust fund. Right now, "everything else" is simply pretending the problem doesn't exist. The Trust fund won't run of money early in the next decade as many people fear, but inaction would lead to a reduction in benefits. The good news: Congress inevitably gets around to "fixing" Social Security, as has been the case a number of times before. 

Still, it's good to understand the options at hand. And in a moment, I'll tell you which course of action is most likely. 

if you want to get a good sense of the challenges that the fund faces, you can read a report from the Congressional Budget Office (CBO). As that report notes, the fund is spending more and more each year as Baby Boomers reach retirement age in droves. In fact, you can try to fix the problem yourself, with this online game.

So what are the options? We can look at some likely choices, which are based on the research of a firm called HealthView Services.

One option is to raise the retirement age (i.e. when a person would be eligible for their full projected benefit), which has already been raised a few times and now stands at 67. I think this is unfair. While some people will surely be able to work into their 70's (and perhaps even want to), many people would have a hard time handling a demanding job much past their late 60's. So many Americans face difficult finances in their senior years, and can ill afford to forego money that they had been counting on. 

Another option: eliminate the widow's survivor benefits. As the law currently stands, spouses with a lower benefit see their benefit jump up to the benefit of their spouse upon widowhood. This also could create great financial strain for some seniors. Moreover, it's a tiny fix. 

Another option: apply an asset test (also known as a "means test,") reducing or eliminating benefits for people with ample wealth in their senior years. "I paid into the system and I want what's mine" is what you'll hear many (ungenerous) people say. As I often remind clients, Social Security should not be seen as a Return on Investment (R.O.I.), it's an insurance policy against impoverishment (and inflation) in old age. I am not opposed to this approach, but respect that it's a sort of "third-rail" issue for many people. 

Social Security Trust fund administrators can also extend the solvency of the program by boosting benefits below the rate of inflation. That's what happens with pensions, and over a few decades, a Social Security payment would have a much harder time keeping up with the cost of living. I am not a fan of this approach, although combined with a means test, it may be workable. (Social Security benefits could also be more highly taxed for people that have ample assets or other income sources in retirement). 

The last option, which strikes me as the politically palatable (and the most reasonable) would be to raise the amount of earnings subject to FICA. Right now, people pay 7.53% of their income on the first $170,000 or so of annual earnings. Raise that figure to $225,000 or even $250,000, and Social Security's finances would be shored up for many more years to come. 

Here's the bad news: The longer that Congress waits to make a decision, the more costly any of these moves will be. Let's hope our legislators make the necessary hard choices sooner, rather than later.