Tags: Vernon | Social Security | tax | benefits

Stanford's Vernon: Fixing Social Security Means Touching the Third Rail

By    |   Tuesday, 10 March 2015 09:00 AM

Social Security can survive despite its precarious balancing act, but it will require both tax increases and benefit reductions, according to Steve Vernon, a former consulting actuary who is now a research scholar for the Stanford Center for Longevity.

In a guest column for CBS Moneywatch, Vernon said there are only three choices for eliminating the long-term shortfall in Social Security — hike taxes, slash benefits or the hybrid of both.

Despite the fact that making adjustments to Social Security has long been called "the third rail" of U.S. politics — politicians fear touching that charged issue because of the possible consequences — Vernon believes adjustments are unavoidable.

"With Republicans now controlling Congress and the presidential elections looming, the debate over how to close Social Security's long-term budget deficit -- always a hot-button topic -- is sure to heat up in the months to come," he noted.

Vernon said the Social Security Administration (SSA) estimates the program's debt already adds up to 2.88 percent of each American's paycheck.

However, simply hiking the federal payroll tax that helps fund Social Security is probably not a workable solution, Vernon said.

An across-the-board jump in the payroll tax rate for all workers from the current rate of 12.4 percent to 15.5 percent in 2015 would solve the deficit problem, he said — at least temporarily.

"However, given the current political climate regarding tax increases, this might be a nonstarter," Vernon stated.

Also, eliminating the existing payroll tax cap for higher income workers would not by itself be enough to solve the deficit, according to the SSA's own projections, he said.

Likewise, applying the payroll tax rate of 12.4 percent to the value of employer-sponsored health
insurance would be "politically toxic," Vernon predicted.

And widening the federal tax on Social Security benefits themselves would likely also be a non-starter. "Because most of the Social Security income of higher-income retirees is already subject to income taxes, taxing everyone's Social Security benefits would affect lower-income retirees the most," he noted.

Finally, investing some of the Social Security Trust Fund in stocks instead of low-yielding securities, as some economists have suggested, would not do enough either to cut the deficit, according to Vernon.

"The last time Congress passed major legislation to balance Social Security was in 1983, when it approved a package that increased Social Security taxes and reduced benefits.

"It looks likely that once again, a politically feasible solution to eliminate the current Social Security deficit will need to combine tax increases with benefit reductions," he concluded.

In a guest column for The Wall Street Journal, Gus Sauter, a senior consultant to Vanguard Group, said one reason many Americans are complacent about saving and investing is because they have "irrational expectations" that Social Security will give them a comfortable retirement.

"The government acknowledges that Social Security is designed to provide just a subsistence level of income and that retirees will need to supplement what they receive from Social Security," Sauter warned.

He said working Americans absolutely need to take advantage of tax-sheltered retirement strategies such as 401(k) and Roth plans. "That is free money and you'll never get a better return on your investment," he said.

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Social Security can survive despite its precarious balancing act, but it will require both tax increases and benefit reductions, according to Steve Vernon, a former consulting actuary who is now a research scholar for the Stanford Center for Longevity.
Vernon, Social Security, tax, benefits
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2015-00-10
Tuesday, 10 March 2015 09:00 AM
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