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7 Ways to Make Social Security Solvent

Debate over Social Security's future emerges again as the program celebrates its 75th year.
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BOSTON (TheStreet) -- Celebration of the 75th anniversary of Social Security, of its benefits to the elderly and disabled, is tempered by doubts about the system's solvency.

People are living longer, after all, and that means more will collect benefits for longer periods. The 79 million baby boomers on the bleeding edge of retirement could break the system, some say, especially considering a persistent plunge in employment and the payroll taxes that is the life's blood of the system.

But defenders of the system, which was signed into law Aug. 14, 1935, say it can be fixed. Some of their ideas are simple tweaks, and others are radical and complicated: eliminate the income cap; ease into a payroll tax increase; claim the estate tax; implement a tax on some market transactions; raise the retirement age; add a degree of privatization; and switch from government sale of Treasuries to government purchase of a "global index of all stocks and bonds."


Fears of insolvency have been stoked, rightly or wrongly, by the annual report of the Social Security Board of Trustees. The combined assets in the trust funds of the Social Security Old-Age and Survivors Insurance and Disability Insurance, known as OASDI, will be exhausted in 2037, it estimates. Program costs will exceed tax revenues this year and next. From 2012 to 2014, costs drop back behind revenues, but will permanently exceed tax revenues starting in 2015.

The annual cost of Social Security benefits represented 4.8% of GDP last year and is projected to increase gradually to 6.1% in 2035, then decline to about 5.9% by 2050 and remain at about that level, the report says. Projected OASDI tax income will be sufficient to pay about 75% of scheduled annual benefits in 2037 through 2084 after the combined trust funds are projected to be exhausted.

"There are lots of cross-currents when it comes to information about Social Security," says Nancy Altman, chairwoman of the board of directors of the

Pension Rights Center

, a nonprofit organization dedicated to the protection of beneficiary rights. "Some people think it needs to be modernized. I don't think it needs to be modernized. Some people say it is broken and needs to be fixed. I don't think that's right either. It is actually the most fiscally conservative and prudent program

the government has. It is the only program that gets projected out 75 years. It is a much longer valuation period than private pensions or other countries use."

Altman -- who was assistant to Alan Greenspan when he was chairman of the bipartisan commission that developed the 1983 Social Security amendments and wrote

The Battle for Social Security: From FDR's Vision to Bush's Gamble

-- thinks the projections of trustees are often "stood on their head" by pundits and the media.

"When you are projecting out 75 years, you will see an unexpected deficit or surplus," she says. "It is important to have a lot of lead time and calmly and carefully make adjustments so that those benefits can continue to be paid. That's the whole idea of these lengthy valuations. Instead they have had the effect of making people think, 'Oh my gosh, it is not going to be there, it is going bankrupt, there is a crisis.'"

Altman is clear that there are problems that need to be addressed. But these issues are neither "curveballs nor unexpected."

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"The baby boomers were not a surprise to the actuaries," she says. "They issued a report in 1947 that took into account the fertility rates in 1946. When they issued their report in 1955, they knew there was a baby boom. When they issued their report in 1970, they knew the fertility rates had dropped and there were fewer babies being born. They are trained to project out life expectancies and they understood and factored in that people are living longer."


Altman believes "very small adjustments can bring things back into balance."

"The most recent trustees report shows that with no changes whatsoever -- if Congress were never to act, which is completely unlikely -- Social Security could continue to pay benefits in full and on time for the next 27 years. After that, if Congress took no action whatsoever, it could still pay three-quarters of the expected benefits forever. That's not good enough, of course, we want 100%. But there is a lot they could do and even very modest things would make a huge difference."

Altman and her coalition say there should be no benefit cuts, and that stand includes no increase to the retirement age.

Among her suggestions are

eliminating the income cap


implementing a payroll tax increase

that would not go into effect until 25 years from now, "when we need the revenue."

She also sees the need to find a new source of dedicated revenue.

"Most of the revenue has been historically -- and will continue to be -- contributions from workers and their employers. That is how it should be." To supplement that, she is calling for a

restoration of the estate tax

-- on hiatus, but due back on the books next year -- and dedicating its collections to bolster Social Security.

"That would take care of about a quarter of the estimated shortfall, about the same amount as raising the retirement age to 70," she says.

Another proposal she agrees with is a

transaction tax on trading


"Great Britain has had a tax since the 1970s on the sales and purchases of stocks," she says. "It is only one-half of 1% of transaction costs. If we had that same tax in this country, it would apply to credit swaps and derivatives and all these esoteric instruments and cut down on speculation. It would not only put Social Security in balance, you could raise benefits."


"I definitely would agree that it needs to be reformed in the long run, but Social security is here to stay," says Kenn Tacchino, head of the Economics, Finance and Taxation Department at Widener University and director of

The New York Life Center for Retirement Income at The American College

. "Retirees are afraid, but erroneously, of Social Security ending. They see 2037 in the headlines and think it's the end of the world."

Like Altman, he sees "minor modifications" as a key to boosting the system, But unlike her, he thinks

raising the retirement age to 70

would be prudent and is likely to happen.

"It makes the most sense because people are living longer -- not just longevity from birth, but longevity from age 65 is increasing," he says. "It is certainly what Europe is talking about now, with debates over whether or not they can go all the way up to age 70. It is a doable change that would have a tremendous benefit in how the system works."

He also says it "wouldn't take much of an increase in taxes for the FICA system to right the ship." The Federal Insurance Contributions Act provides the authority for the collection of Social Security payroll taxes.

Tacchino isn't a proponent of privatization as it was proposed under the Bush administration and more recently by leading Republicans.

"I'm a big believer of stocks in the long run for your retirement portfolio," he says. "I just think this is a different thing. It is an insurance program rather than an investment program."

He does, however, support the idea of "

supplemental, privatized Social Security

," a system that might be "part mandatory, part voluntary."


Wade Dokken, a former adviser to Hillary Clinton, is founder of Montana-based

WealthVest Marketing

and author of

New Century, New Deal: How to Turn Your Wages into Wealth through Social Security Choice

. A staunch Democrat, he nevertheless has been a proponent of privatizing the system.

Instead of investing FICA inflows in specialized Treasury bonds, he suggests the government "take all the receipts, balance them so it's actuarially funded, and

invest in the entire global index of all stocks and bonds

. It would be a mirror of the world's equity and debt mix. So the fund would have a performance equal to the asset weighting of all the world's developed countries and developing countries on their debt and equity side."

Done correctly, he says, management fees could be kept low and there were would be greater returns with a level of constancy.

Dokken calls for a "funded system" rather than the current one, where younger generations pay in for the current needs of retirees. He also would prefer funding Social Security directly through FICA as opposed to the system now: "The money came in, the U.S. government issues its new class of bonds and that money is spent as general revenue. We have basically concealed the operating deficit of the country."

He disagrees, however, with people who deride Social Security as a Ponzi scheme. "It is not. It is like every other defined-benefit pension system except that the federal government didn't place the restrictions on themselves that they would put in place on a private company," Dokken says.


Altman, dead set against privatization, is concerned that President Barack Obama's hand-picked Commission on Fiscal Responsibility and Reform, a bipartisan panel looking at ways to lower the federal deficit, may look to implement some form of it when making recommendations.

"The privatization proposal was a really terrible idea that would have really weakened economic security in this country," she says. "At least with President

George W. Bush he announced his plan and went around the country to promote it. The thing I worry about this commission is that they are meeting behind closed doors and not scheduled to report until Dec. 1, which is, of course, safely after the election. There is agreement already with the congressional leadership that if they are able to achieve 14 of 18 votes, which I think is something they might be able to do, that it would come up in a lame duck session. Our understanding is it could be in an up or down vote. It is all intended to avoid political accountability."

"I think what is going on is that there are, in addition to that group that is just ideologically opposed to the idea of Social Security, a number of fair-minded and reasonable elected officials have somehow been convinced by a select group of experts that the program has to be scaled back. They think the right thing to do is to scale it back, but they know it is politically difficult to do. My message is that is not the right thing to do. It is politically dangerous for a good reason -- because that is not what the American people want and that is not what has to happen."

-- Reported by Joe Mont in Boston.


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