Setting Social Security straight gains urgency

DALLAS - Social Security has some grim news for John Ansbach of Dallas and other members of Generation X. If the system continues on its current course, it won't have enough money to pay full benefits by the time they retire.

Ansbach, born in 1971, will be eligible for full retirement benefits at 67, in 2038.

But the government trustees who monitor Social Security's long-term financial soundness recently reported that the system will use up its trust funds by 2037 and have only enough from its tax collections to pay beneficiaries 76 cents on every dollar.

Still, Ansbach isn't fazed by that gloomy forecast. As a member of the fiercely independent Generation X, born between 1965 and 1980, he says he's never had much faith in Social Security's ability to keep its long-range promises.

"Gen Xers intend to work as long as we can and save as much as we can, because we aren't counting on the government or anyone else to help us in our old age," said Ansbach, general counsel of EFA Data Processing in Frisco, Texas, and a generational dynamics consultant.

Experts expect the trustees' latest report will put new pressure on the Obama administration and Congress to make a midcourse correction in Social Security so that workers in their 30s and 40s, like Ansbach, can have more confidence in the system.

There are dozens of ways that lawmakers could go, but options raised by research groups include lifting the cap on workers' taxable earnings, gradually increasing the full retirement age and scaling back annual inflation adjustments.

Some administration officials, such as Treasury Secretary Timothy Geithner, and congressional leaders, like House Majority Leader Steny Hoyer, D-Md., say they could start work on Social Security as soon as they finish with health-care reform.

The Senate Aging Committee has also scheduled a hearing for June to take up the issue.

Stabilizing Social Security's finances will be much easier than overhauling the health care system, analysts predict.

"The policy options have long been known. This is a matter of making choices," said Dennis Ippolito, an expert on the federal budget and chairman of the political science department at Southern Methodist University.

"Social Security will be around for future generations, though it will be less generous," he said.

The program's woes are only partly a result of the nation's 78 million aging baby boomers, the oldest of whom became eligible for early retirement benefits at 62 last year. The problems also stem from people living longer.

Today, 65-year-old men live an average of an additional 16.9 years, while 65-year-old women live 19.3 more years. By 2040, actuaries say, life expectancy at age 65 will be 19 years for men and 21.1 years for women.

Reform can't come too soon for David John, a retirement security analyst at the Heritage Foundation who says the recession has only made Social Security's long-term financial problems worse in the last year.

"The recession squeezes the system at both ends," he said. "Workers who have been laid off are no longer paying Social Security taxes, while older workers who have lost their jobs are filing for benefits earlier than planned."

As Social Security has run surpluses over the last few decades, the government has borrowed that money for other purposes. But by 2016, Social Security will spend more than it collects in taxes.

It will then expect the government to make good on its IOUs.

"Social Security's trust funds aren't a store of cash; they're a stack of IOUs," John said. "When those debts start to come due, the government will have three choices - increase taxes, cut its other spending or expand its borrowing."

To set Social Security's finances straight, the Obama administration and Congress will need to raise more revenue from workers, scale back the growth of benefits or pursue a combination of the two, experts say.

Because of the thrashing the market has given 401(k)s in the last year, almost all analysts agree that the private retirement savings accounts advocated by the Bush administration four years ago are off the table this time.

"Acting sooner rather than later on Social Security is in everyone's interest," said Bruce Schobel, president-elect of the American Academy of Actuaries.

"The earlier we begin, the more options we'll have," he said. "If we wait until we're staring at bankruptcy, the only recourse will be an immediate tax increase. Benefit cuts can reap big savings over time, but not in the short run."
The actuaries propose a later retirement age as part of any reform package.

"This is primarily a demographic problem that demands a demographic solution," Schobel explained.

As a result of Social Security's last major reform in 1983, the full retirement age is increasing from 65 to 67 over three decades. But it will hold at 67 for workers born after 1959. The actuaries want it to go higher.

"As long as notice is given far enough in advance and the increase is phased in over a number of years, a higher retirement age shouldn't surprise anyone," Schobel said. "People will be able to plan for it."

Lawmakers are also likely to discuss raising the cap on wages subject to Social Security payroll taxes beyond the automatic annual increases so that higher-earning workers would pay more, said Melissa Favreault, a sociologist at the Urban Institute.

The cap - $106,800 in 2009 - was once set at an amount that taxed 90 percent of all wages, but it has slipped to 83 percent because earnings at the top of the economic ladder have risen faster than average wages, she said.

Congress might also consider raising income taxes on the Social Security benefits of higher-income retirees, said J. Carter Murphy, a retired Dallas economist who once worked for the President's Council of Economic Advisers.

"Even though I wouldn't like paying more taxes on my benefits, it would be preferable to a broader benefit cut that could hurt lower-income seniors," he said.

Social Security's financing problems aren't so severe or immediate that they will require extreme measures, said Alison Shelton, an analyst with the AARP Public Policy Institute.

A 13.7 percent increase in payroll taxes or an 11.5 percent cut in future Social Security benefits would close the system's projected deficit over the next 75 years, but nothing so drastic will be necessary, she said.

Instead, Shelton predicts, lawmakers will settle on a package that balances more modest tax and benefit measures.

The recession will probably help the Obama administration and Congress gain public support for shoring up Social Security, said Jacqueline Angel, a professor of public affairs and sociology at the University of Texas at Austin.

"As the market has devastated nest eggs, millions of Americans are relying more on Social Security than they had once planned," she said. "More than ever, people realize we've got to protect this source of retirement income."

(c) 2009, The Dallas Morning News.

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