A Middle Way Out of the Social Security Problem

A client sent us earlier this year a gift subscription to the Kiplinger Personal Finance Magazine. I didn't have high expectations for the magazine, but it turned out to be really pretty good, and seems to be especially oriented toward middle-agers. One of the columnists, Mary Beth Franklin, the Senior Editor, very competently addresses the Social Security problem in this month's issue, and she had this to say about a middle-way solution to the grid-lock between the Dems (no reduction in benefits!) and the Repubs (no increase in taxes!):

A middle ground. A think tank called Third Way has staked out some middle ground. It has developed a proposal to increase Social Security benefits slightly for the most vulnerable, trim benefits for the wealthy and eliminate them altogether for the super rich. (That means Derek Jeter would have to forfeit his Social Security.) It also proposes to adjust taxes in a way that won’t be burdensome for a workforce that will have to support a large and aging population of retirees.

The proposal—which reflects many of the concepts outlined by the bi­partisan National Commission on Fiscal Responsibility and Reform in its December 2010 report—would gradually increase the retirement age to 68 for today’s 38-year-olds and eventually set it at 70 for today’s 4-year-olds, with hardship exemptions for those who need to retire sooner. Pegging the retirement age to reflect increased longevity will close slightly more than one-third of Social Security’s projected 75-year shortfall.

The Third Way proposal also tinkers with the consumer price index formula that is used to set annual cost-of-living adjustments for retirement benefits. Using this alternative COLA formula to slow annual increases could close another one-third of the program’s projected funding gap.

On the revenue side, the group proposes that by 2020 the government extend the payroll tax to those earning up to $190,000 a year—up from today’s $106,800 cap. It would also tax 100% of Social Security benefits received by high-income retirees, up from 85% today. Together, the revenue changes would close the remaining third of the program’s projected shortfall.

This makes a lot of sense to me. But read the entire article here. Also, the homepage of the Third Way website, to which Ms. Franklin's article links, also invites a further look.