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Social Security Fixer-Uppers

By Martha M. Hamilton
Sunday, June 24, 2007

I just solved the Social Security problem in three easy moves.

I launched the online Social Security Game, made a few choices and, voila!

It was simple, really, especially for someone unencumbered by running for election.

Lots of folks are worried about what will become of Social Security, including people in their 20s and 30s who are saving like crazy in IRAs and 401(k)s because they don't expect Social Security to be there when they retire.

Even so, the words have hardly been whispered in the presidential campaign. The candidates have stuck to safe topics, such as the war in Iraq and abortion.

But among academics and public policy types, the future of Social Security is a hot topic and, they say, maybe not so complicated. For the rest of us, it's vital to understand the choices involved so we can have a say in how it gets fixed.

Two organizations have produced easy ways to start thinking about what needs to be done. The American Academy of Actuaries produced the Social Security Game with a challenging invocation -- "You fix it!" And the Center for Retirement Research has produced what looks like the Little Golden Book of Social Security, called "The Social Security Fix-It Book."

Both lay out ways to bridge the funding gap and the pros and cons of each. But with each proposed fix, there are winners and losers, which means powerful interests are lined up for and against.

Demographics eventually will force the issue as the number of retirees receiving benefits outstrips the number of workers contributing taxes. So sooner or later, changes will be made, and they could make a major difference in your retirement. That's what finally forced me to pay attention, and I found an easy way to get into the subject through the game and the book.

The first question that faced me while playing the game was whether to increase the retirement age for full benefits and, if so, how quickly.

The age is already creeping up. Until 2003, everyone qualified for full benefits on turning 65. But then, as a result of an agreement reached 20 years before, the age began moving higher. This year, it takes 65 years and 10 months to qualify, and for those born after 1960, it's 67.

The game gave me three choices: Do nothing, speed up the process or raise the age to 70 in 2030. I opted to raise the age to 70. And it solved nearly 70 percent of the funding problem.

The game ( http://www.actuary.org/socsec.asp) and the book ( http://www.bc.edu/centers/crr/fixit.shtml) cover somewhat similar ground, though sometimes posing different scenarios for benefit cuts or revenue increases, the two basic approaches to solving the problem.

For instance, both the game and the book zeroed in on the question of reducing the annual cost-of-living adjustment. The so-called COLA is designed to protect the purchasing power of Social Security benefits. In the game, players are given a yes-or-no option of whether to reduce it by half a percentage point. (I said no, because I'm looking forward to those increases when I start to draw Social Security.) The book doesn't suggest a specific figure, but it notes that the consumer price index, on which the COLA is based, usually rises faster than the prices most people actually pay. That's the same argument the game makes in favor of the cutback.

I had to make several other decisions in the game. I chose not to reduce benefits to retirees by 5 percent and not to curb benefits for those earning more than $20,000 a year before retirement. I also nixed an increase in the payroll tax to 6.7 from 6.2 percent for both workers and employers. That's a killer for low-income workers and also tough on small-business owners.

Now, what about increasing the wages on which you pay Social Security taxes? That level is set at $97,500.

Truth told, my first instinct was to eliminate the wage cap altogether. But as the book notes, even raising the cap "could undermine political support for the program among workers with the highest earnings." I decided to take the more political course and increase it by 25 percent. And with that second step, I was more than 95 percent of the way to closing the funding gap.

Next I had to face whether to tax Social Security benefits like pension benefits are taxed. Are you kidding? That would hit me.

What about including new state and local government workers under Social Security? Okay. Why should they have separate retirement plans?

Bingo! Social Security funding problem solved.

Okay, my solution may not be the perfect one. It may have more than a tinge of self-interest. As the game points out, keeping Social Security financially sound will require constant fine-tuning unless we build in automatic adjustments. My solution relied on one-time fixes.

But the point made by both the game and the book is clear. It's not answers that are in short supply. It's political will.

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