Clarence Fanto | The Bottom Line: Shore up Social Security by removing payroll tax cap
LENOX — How many Americans depend totally or partially on Social Security?
According to a government report issued in June, the answer is 60,535,000, including all categories of beneficiaries such as retirees and their families, disabled workers, spouses and surviving children. The average monthly benefit for retired workers is $1,347.
Monthly payments will go up next year by just under $2.50, well below the rate of inflation for food and health care. Enough for a gallon of gas or a carton of milk.
Recently, the Social Security Administration issued a grim forecast that the trust fund held by the U.S. Treasury for the nation's most popular safety net will be zero in 2034. Medicare is slated to run out of funding in 2028, two years earlier than previously projected.
There is an obvious solution, one favored by presumed Democratic presidential nominee Hillary Clinton and opposed by many Republicans in Congress who want to partially privatize Social Security.
First, here's what won't work.
The privatization scheme, which President George W. Bush advocated but then abandoned during his second term under political fire, would gut what Republicans call an "entitlement program" by reducing benefits and making workers responsible for creating and funding their own investment accounts.
Look, there's no "entitlement" involved. The retirees who collect benefits have paid into the system, along with their employers, a total of 12.4 percent on earnings up to $118,500. That's the current cap on payroll taxes. The monthly benefits are based on employees' lifetime earnings, as well as the age they begin collecting, which can range from 62 to 70.
Proposals to raise the retirement age for eligibility have gone nowhere so far, nor should they. The age for a full payout is now 66, rising gradually to 67 for newly eligible workers.
Reduced benefits can be collected at age 62, a big mistake because the monthly check will be about 32 percent lower than the full benefit. Waiting until age 70 yields a comparable increase over the amount retirees get at age 66 or 67 — the amount goes up by 8 percent a year.
Those who favor raising the eligibility age point to increased life expectancy, but studies show it's the more affluent who are living an average of six years longer than in the 1970s. Workers with below-average incomes have gained only about a year.
It's easier for professionals in comfortable jobs to push for a higher retirement age. But employees in the service industries, especially those who perform manual labor, often suffer from physical ailments that can make it difficult to work beyond their early- to mid-60s.
Besides, this solution would only eliminate half of Social Security's funding shortfall, meaning the program would run out of money in 2055 or thereabouts, instead of around 2090.
There are other proposals such as further reductions in cost-of-living adjustments, and downward benefit payouts for higher earners up to $118,500. But that would be unfair, since these workers and their employers paid the same 12.4 percent into the system as everyone else.
Here's the best solution, as supported by Mrs. Clinton, among other politicians and economists:
Remove the payroll cap, which is "regressive" since earnings above $118,500 are spared from the Social Security tax. That would keep the trust fund solvent in full for 75 years and is totally fair.
About 19 percent of U.S. households earn more than $118,500 a year, according to the U.S. Census Bureau's 2014 statistics. Why should income above that level be free of payroll taxes, meaning the higher your pay, the less you're burdened.
The need to fully fund Social Security is obvious. If nothing is done, after 2034 benefits would have to be cut by at least 20 percent a month.
"Lawmakers should address these financial challenges as soon as possible," according to a report by the Social Security Trustees issued last month. "Taking action sooner rather than later will permit consideration of a broader range of solutions and provide more time to phase in changes so that the public has adequate time to prepare."
An advocacy group, the National Committee to Protect Social Security and Medicare, points out that "seniors continue to see their modest Social Security benefits eaten away by growing health care costs."
Solving the even more immediate Medicare shortfall for its inpatient care trust fund is a bigger challenge.
Health care cost increases are difficult to forecast as private insurers seek to protect their profit margins and excessive executive compensation through raising premiums by unconscionable double-digit percentages in many cases.
More than 55 million Americans, including seniors and disabled people, are covered under Medicare.
If Congress could break out of its partisan gridlock to get some serious work accomplished by tackling these and many other significant issues, perhaps more Americans would regain confidence in our political system.
Otherwise, the cynicism, disillusion and revulsion felt by many citizens against Washington could make the current political campaign seem like a teddy bears' picnic.
Contact Clarence Fanto at email@example.com. The opinions expressed by columnists do not necessarily reflect the views of The Berkshire Eagle.
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