How to shore up Social Security for 75-plus years

Worried about the projected Social Security funding shortfall? Frustrated that lawmakers aren't doing anything about it? Then you'll want to learn about a 13-point proposal from the Bipartisan Policy Center (BPC) that's projected to secure Social Security for more than 75 years and modernize the program to better meet the needs of the changing U.S. workforce.

The Social Security proposals are part of a comprehensive report by the BPC that addresses six major challenges to retirement security.

The problem -- and the solution

Social Security benefits for current retirees are financed by payroll taxes from current workers and withdrawals from the Social Security trust fund. The trust fund is scheduled to be exhausted in 2034, at which point current law requires benefits to be reduced to the level that payroll taxes along can support -- about 77 percent of scheduled benefits.

A number of factors are contributing to the erosion of Social Security's funded status. For example, Americans are living longer, and the birth rate has been dropping for decades. As a result, fewer workers are paying taxes to support the increasing number of retirees.

The BPC's 19-member Commission on Retirement Security and Personal Savings comprised political leaders, retirement experts, academics and industry executives. Its compromise plan for Social Security blends new revenues and restraint on future benefits.

The commission believes beneficiaries with the highest incomes should make proportionally larger contributions on both revenue increases and benefit constraints. The BPC proposals would close 54 percent of the funding shortfall by adding revenue and 46 percent by adjusting benefits. Addressing the program's challenges now will prevent sudden and disruptive reductions in benefits in 2034.

Benefit changes

Taken as a package, the BPC proposals would enhance benefits for low-income workers, widows and widowers, while reducing benefits from the current schedule for affluent workers and beneficiaries. Here are the main features:

• Increase the progressive nature of Social Security's benefit formula, with wage earnings at lower levels replaced in retirement at higher rates and earnings at higher levels replaced at lower rates. A 10-year phase-in of this new formula would begin for workers who attain age 62 in 2022. Older workers wouldn't be affected.
• Apply the benefit formula annually to earnings to more evenly reward continued work. For example, the current formula would pay equal benefits to a worker who earns $100,000 for 15 years compared to a worker who earns $50,000 for 30 years. Under the current formula, there's little or no increase in benefits for workers who pay taxes into Social Security for more than 35 years. The BPC proposals would continue to increase benefits for workers who pay into the system for up to 40 years.
• Establish a basic minimum benefit to enhance Social Security for low-income workers.
• Increase retirement ages to reflect improvements in longevity. The current full retirement age is 67 for workers who attain age 62 in 2022 or later. This age would increase by one month every two years, until it reaches age 69 by 2070. Similarly, the maximum retirement age of 70 would increase gradually to age 72. Workers attaining age 62 before 2022 would not be affected.
• Keep the earliest retirement age at 62 to reflect the fact that lower-income workers haven't experienced significant gains in longevity. Together with the basic minimum benefit described above, early retirement at age 62 protects lower-income workers.
• Reduce future cost-of-living adjustments (COLA) by using the "Chained Consumer Price Index" to increase future benefits. Many economists have concluded that the current COLA overstates actual inflation because it doesn't reflect how consumers adjust their spending habits in response to price increases.
• Cap the nonworking spousal benefit. Currently, spouses receive the greater of the benefit based on their own earnings record or the benefit based on 50 percent of the primary wage-earner's benefit. This feature is a vestige of a prior era when women were less likely to work outside the home. Today, the spousal benefit is more likely to reward affluent households who can afford to have just one spouse working.
• Enhance the widow's and widower's benefit by increasing benefits paid after one spouse passes away. The recommendation would also reduce the initial benefits paid to a married couple to help pay for this enhancement. In essence, the modification redistributes the lifetime benefits paid to a married couple.
• Eliminate the windfall elimination provision and government pension offset that apply to workers who spend a significant portion of their career in government positions that don't participate in Social Security. This would apply to workers attaining age 62 in 2022. Instead, apply Social Security's benefit formula on pro-rata basis, using the fraction of a worker's total lifetime earnings that are covered by Social Security.
• Reinstate benefits for college-age children of deceased beneficiaries and certain disabled beneficiaries.

Revenue increases

The BPC package contains four suggestions that increase revenues paid to Social Security and federal income taxes:

• Increase the taxable wage base from $118,500 in 2016 to $195,000 by 2020.
• Gradually increase the payroll tax rate each year from 2017 to 2026, for an ultimate total increase of 1 percent, shared equally by employees and employers.
• In 2022, for the highest income beneficiaries, start taxing Social Security benefits in their entirety instead of just the 85 percent taxed now. This would apply to beneficiaries with adjusted gross income over $250,000 for singles and $500,000 for couples.
• Use the Chained CPI to index federal income tax brackets. Slowing the rate of increase in the tax brackets will increase federal income tax collections over time.

In addition to these changes, the BPC report recommends that Congress improve the Disability Insurance portion of Social Security by making certain benefit changes and revenue enhancements.

The BPC package makes a courageous but necessary stand to improve Social Security's funded status. Let's encourage our elected officials to set aside partisan politics and seriously consider the BPC proposals. It's time for them to apply fiduciary standards to themselves and act in Americans' best interests.