August 20, 2011

Few government programs invite more magical flights of fancy than Social Security.

Elected officials line up to defend Social Security's status quo, even when doing so means imperiling the program's long-term sustainability. Special interest groups cast most potential solutions as threats, knowing there are few surer means of raising money fast than warning America's seniors that someone is trying to take their money away. And then there are Social Security recipients themselves, who insist nothing is in need of fixing because Social Security has its own dedicated trust fund.

Social Security's problems may pale next to those of Medicare, but that doesn't make them less real or consequential. Worse, ignoring them or pretending they will go away means passing on the opportunity to enact simple, long-term fixes that could strengthen Social Security for generations to come.

But that won't happen unless we're first willing to acknowledge that we have a problem and it's getting worse, not better.

In a nutshell it is this: Social Security is already running an operating deficit, meaning it pays out more to beneficiaries than it takes in from worker and employer contributions. The losses are covered by redeeming assets in the Social Security Trust Fund. By 2022, the trust fund itself will begin to shrink. By 2036, the fund's assets will be exhausted.

From that point through 2085, Social Security is, at present, committed to paying out $6.5 trillion more than it is expected to take in.

Before pooh-poohing all 75-year projections as alarmist, consider that the same concerns about future liabilities have been used to justify rejiggering the pension plans of public sector employees.

There's also this sobering warning from Social Security's trustees: "There was no scenario within a 95 percent confidence interval in which Social Security would avoid trust fund exhaustion past mid-century."

In English that means, "We played with the numbers but, try as we might, couldn't produce a happier outcome."

While Social Security's ultimate day of reckoning might be two decades away, its existence looms over the current discussions about annual budget deficits, the national debt and the nation's long-term creditworthiness. One reason Standard & Poor's lowered the U.S. credit rating is because it doubted the political will to address these problems before they reach the crisis stage.

Imagine, then, how voters and the markets would react if the new deficit reduction supercommittee expanded its mandate to include strengthening the country's largest entitlement program.

Fortunately, there are a lot of good ideas out there that could help Congress avoid the fewer, harder choices that await if we dither. Some of them include:

•Lifting the cap on wages. Currently, Social Security taxes wages up to $106,800, which means the wealthy pay a smaller percentage of their incomes than the poor. Medicare, in contrast, has no wage cap. Making all incomes pay the same Social Security tax rate would raise an estimated $350 billion annually. Other alternatives, such as doubling the cap or instituting a lower tax rate for any income above the current cap would raise less revenue but blunt criticism that people might have to pay in dramatically more than they'd ever take out.

•Raising the retirement age for full benefits. This was last done in 1983, when it was raised from 65 to 67, and makes perfect sense because Americans are living and working longer. Social Security's actuaries have estimated that raising the retirement age to 68 for those turning 62 in 2022 -- that would include me -- would reduce the program's 75-year funding gap by 29 percent. The plan offered by the deficit reduction task force led by Alan Simpson and Erskine Bowles would also create an exemption for workers in physically demanding jobs.

•Tinkering with the formula used to calculate annual cost-of-living adjustments. Social Security currently uses the Consumer Price Index for Urban Wage Earners and Clerical Workers. Many economists believe a more accurate index is one that accounts for the different choices consumers make when prices of a certain good rise. If the price of beef rises, for example, we buy chicken instead. This "chained CPI" rises at a slower rate than the regular CPI, an average of 0.3 percent per year less. Over a decade, that would mean a savings of $255 billion.

•Ease the restrictions on immigration for highly educated foreigners. Economic growth can go a long way to solving some of Social Security's woes, and what better way to do that than to throw open our doors to the world's best scientists, engineers and entrepreneurs. A decade ago, the U.S. issued almost 200,000 H1-B visas annually; the current annual quota is 65,000.