Slideshow 5 Ways to Fix Social Security

  • April 29 2015, 3:19pm EDT
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5 Ways to Fix Social Security

The U.S. Social Security system is stronger than many people realize. And by downplaying its benefits, your clients may not recognize this important source of safe, fixed income in their retirement years -- a misconception that can hurt asset allocations.

Even so, however, there are some long-term funding issues that need to be addressed. Contributor Dave Lindorff talked to advisors and academics to discuss some of the possible ways the feds could fix the system. Those ideas are highlighted in the new few slides; you can read his full story here.

1. Wait Till There's an Emergency

As a practical matter, some experts argue that Congress will not let Social Security run out of money. The baby boomers may be straining the program now, but they're also the ones who make up a substantial portion of the voting public. And in 15 years, they'll be an even larger share of the electorate.

Indeed, in the early 1980s, the program was in worse shape than it is today. But after a raise in the retirement age of one to two years, and a phased-in increase in the payroll tax, it was solved for years afterward. Whenever the country hits the point where we have the same political will to make similar changes, there are several possible courses of action.

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2. Increase the FICA Tax

As a cost-benefit analysis, consider a short-term pain that can bring a long-term gain. Specifically, an increase in the FICA tax of 1.2% on employers and employees each would fully fund Social Security for the next 75 years. Even the youngest millennials today could rest easy with that much time left in the program

3. Raise the Payroll Tax Cap

The maximum income subject to the payroll tax is currently set at $118,500. One potential fix would be to increase that cap and adjust it annually. Indeed, this has increased almost every year since 1972 (as recently as 2000, the cap was $76,200), although in recent years the inflation-adjusted increases have become much smaller.

4. Raise the Retirement Age

When Social Security was enacted in the mid-1930s, the average lifespan in American was less than 62 years. Today it's almost 79 years. So while there is more burden placed on the program, this is one tactic has already worked once. Raising the retirement age was one of the fixes that Congress and former President Ronald Reagan enacted in 1983. Before that, the retirement age had been 65, and they raised it to 66 or--for those born after 1960--67.

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5. Cut Benefits for the Rich

Perhaps the least politically popular option, lowering benefits slightly for wealthier American would indeed help the program. Determine where to draw that line and the amount of the benefit reductions would likely be major political debates. But, as noted, the program has been in dire straight before and Congress was able to act.