Social Security fixable, but changes are politically tough

Closing the gapThe options for closing the Social Security gap fall into two broad categories: cutting benefits or raising taxes. There are, however, many options within each category.The Associated Press used data from the Social Security Administration to calculate how much of the shortfall would be eliminated by various options. To illustrate how Social Security’s long-term finances have become worse in the past two years, the AP also calculated the share of the shortfall that would have been eliminated, if the options had been adopted in 2010.TaxesSocial Security is financed by a 12.4 percent tax on wages. Workers pay half, and their employers pay the other half. The tax is applied to the first $110,100 of a worker’s wages, a level that increases each year with inflation. For 2011 and 2012, the tax rate for employees was reduced to 4.2 percent, but is scheduled to return to 6.2 percent in January.Options:Apply the Social Security tax to all wages, including those above $110,100. Workers making $200,000 in wages would get a tax increase of $5,574, an amount their employers would have to match. Their future benefits would increase, too. This option would eliminate 72 percent of the shortfall. Two years ago, it would have wiped out 99 percent.Increase the payroll tax by 0.1 percentage point a year, until it reaches 14.4 percent in 20 years. At that point, workers making $50,000 a year would get a tax increase of $500 and employers would have to match it. This option would eliminate 53 percent of the shortfall. Two years ago, it would have wiped out 73 percent.Retirement ageWorkers qualify for full retirement benefits at age 66, a threshold that gradually rises to 67 for people born in 1960 or later. Workers are eligible for early retirement at 62, though monthly benefits are reduced by about 25 percent. The reductions shrink the longer you wait to apply.Options:Gradually raise the full retirement age to 68 in 2033. This option would eliminate 15 percent of the shortfall. Two years ago, it would have eliminated a little more than 20 percent.Gradually raise the full retirement age to 69 in 2039 and 70 in 2063. This option would eliminate 37 percent of the shortfall. Two years ago, it would have eliminated about half.Cost-of-living adjustmentsEach year, if consumer prices increase, Social Security benefits go up as well. By law, the increases are pegged to an inflation index. This year, benefits went up by 3.6 percent, the first increase since 2009.Option:Adopt a new inflation index called the Chained CPI, which assumes that people change their buying habits when prices increase to reduce the impact on their pocketbooks. The new index would reduce the annual COLA by 0.3 percentage point, on average. This option would eliminate 19 percent of the shortfall. Two years ago, it would have eliminated 26 percent.BenefitsInitial Social Security benefits are determined by lifetime wages, meaning the more you make, the higher your benefit, to a point. Initial benefits are typically calculated using up to 35 years of wages. Earnings from earlier years, when workers were young, are adjusted to reflect the change in general wage levels that occurred during their years of employment.Tinkering with the benefit formula can save big money, but cuts to initial benefits mean lower monthly payments for the rest of a retiree’s life. The average monthly benefit for a new retiree is $1,264.Option:Change the calculation for initial benefits, but only for people with lifetime wages above the national average, which is about $42,000 a year. Workers with higher incomes would still get a bigger monthly benefit than lower paid workers but not as big as under current law. It’s a cut they would feel throughout their entire retirement. This option would eliminate 34 percent of the shortfall. Two years ago, it would have eliminated almost half.