Social Security: Two Approaches To Long-term Solvency

Major Restructuring

Private or Individual Accounts (IAs). The dominant proposal from those who believe the program needs a major restructuring is creation of private or individual accounts. The advocates of IAs recommend taking a part of current payroll taxes, usually 1 or 2 percentage points, from the 12.4 percent employer/ employee FICA tax and moving it into accounts that the individual worker would invest him or herself.

Critics of these individual accounts that take money from the system note that diverting money from the current program would result in a worsening of Social Security’s long-term solvency. They also note that this approach increases the amount of risk the individual has to take.

While advocates of this approach promise there would be no cutting back on the benefits of those in or near retirement, there is concern that future reductions in the program could result in an increase in poverty among older women.

Analysts point out that the proposed option of diverting 2 percent of payroll taxes into private accounts was estimated to cost more than $1 trillion over ten years. None of the private account proposals suggest how to make the transition from today’s pay-as-you-go Social Security program to a privatized individual account system, but almost everyone on both sides of the issue agrees it would be costly.


Potential Adjustments to the Current Structure

The advocates of adjusting the current program suggest a number of options that can be mixed and matched and adjusted to achieve long-term solvency. They include two options that could have a negative affect on women:

  • Raise the age for full retirement based on longevity. This change solves 20 to 30 percent of the long- term shortfall; however it would be a hardship for women and men who have physically demanding jobs. They are more likely to take benefits early and would therefore experience a further reduction in their benefits.
  • Increase the number of work years used to calculate Social Security benefits from the current 35 to 38 years. This change solves about 15 percent of the shortfall but also, has a disproportionately adverse effect on women, who already lag behind men in meeting the current 35 year work requirement.


Former Social Security Commissioner Robert M. Ball developed a comprehensive plan to resolve the Social Security shortfall through a combination of revenue increases and cost reductions including:

  • Gradually, increase the cap on earnings taxable for Social Security to cover 90 percent of wages. Today only 83-84 percent of wages are being taxed. This means losses to the trust funds.
  • Dedicate future proceeds of a revised estate tax to Social Security beginning in 2010. Present law gradually reduces the estate tax so that by 2009, only estates above $3.5 million ($7 million per couple) will be taxed. The tax could be frozen at that level, with the revenues directed toward Social Security.
  • Improve the return on Social Security funds by investing a portion in equities, as just about all other public and private pension plans do. Other government retirement systems such as those for employ- ees of the Federal Reserve Board, the Federal Railroad Retirement Board, and the Tennessee Valley Authority also invest directly in stocks.



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