strib: Plugging the gap/Safer plans for Social Security

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startribune.com


Editorial: Plugging the gap/Safer plans for Social Security
Published November 29, 2004

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No one denies that Social Security faces sobering problems. When baby boomers begin to retire, around 2011, the number of working Americans supporting each retired American will dwindle quickly. Social Security's trust fund, which is growing now, will start shrinking in 2028 and run out of money in 2042. After that the system will rely solely on payroll taxes, which will cover only about 70 percent of promised benefits. This is known as a solvency gap.

But the solvency gap has been studied endlessly by economists and actuaries, and they have developed any number of practical cures. Henry Aaron, the dean of Washington, D.C., retirement experts, has proposed slowing the inflationary growth of Social Security benefits, extending the payroll tax to several million public-sector employees who don't pay it now, and investing trust fund assets for higher returns than they currently earn. Economists Peter Diamond of MIT and Peter Orszag of the Brookings Institution would raise the ceiling on taxable earnings (the current cap is about $88,000) to reflect the fact that much more of the nation's income now goes to high earners, while phasing in modest benefit reductions and a modest increase in the payroll tax. (A worker age 25 today would see a 9 percent benefit cut compared to current-law projections, but still receive more than today's retirees do; the employee's portion of the payroll tax would rise from 6.2 percent now to 7.1 percent in 2055.) Economist John Shoven at the Hoover Institution would create a two-tier system, with the government guaranteeing a basic monthly pension of $500 (about the average benefit today) and adding private accounts financed by a mandatory new contribution with a government match.

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Unlike privatization proposals, however, the plans outlined here acknowledge the difficult truth that any solution to Social Security's solvency gap will require someone to sacrifice something. But Congress has shown it is perfectly capable of making such difficult decisions when necessary, as it did in 1983 and 1993 with tough measures that greatly extended the system's solvency.

Why not use the current solvency problem as an occasion to promote private saving and wean Americans from Social Security? First, Washington already offers Americans a long menu of private retirement accounts, most of them with generous tax incentives, and millions of workers haven't taken full advantage of them. Second, there's an important public role in guaranteeing elderly Americans a decent standard of living, a topic this page will discuss on Tuesday.

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