Small Tax Hike Could Keep Social Security Solvent for Decades

“If payroll taxes were raised immediately by 2.83 percentage points, the government would be able to pay the current package of benefits for everyone through at least 2090,” the brief states, noting the change “should probably be viewed as the first step toward long-run solvency.”

The latest CRR brief also proposes additional benefit changes that target economically vulnerable groups such as caregivers, widows, the “oldest old,” (those 85 and above) and very low-wage earners, who are essentially victims of a changing society that is experiencing a decline in marriage rates, longer life spans and sluggish wage growth.

(Related: Health Care Costs Eat Up Big Chunks of Social Security Benefits)

“The goal is to suggest options for modernizing Social Security that can be both effective and fiscally responsible,” CRR writes.

The brief suggests four benefit changes to help vulnerable individuals:

• Caregiver credits for individuals who care for small children and the elderly and, as result have to reduce their working hours or temporarily or leave the job market. That affects their lifetime earnings and ultimately their Social Security benefits. Credits could be given to parents who have a child under age 6, limited to half the Social Security Administration’s average wage index for five years. Or benefits of caregivers could be based on the highest 30 years of earnings instead of the current highest 35 years.

• Improved benefits for widows equal to 75% of the amount the household received when both spouses were alive, up from 67% currently in one-earner couples and 50% in two-earner couples (with equal earnings). The dollar amount of the increased benefit would typically be limited to the amount received by a worker-beneficiary with average earnings.

• Adequate income for beneficiaries 85 and older, the “oldest old.” This could involve tying benefits to an inflation index linked to spending by the elderly, known as the CPI-E, instead of the currently used Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which underweights health spending by the elderly. Or it could automatically increase by 5% benefits at age 85 and above, with the dollar amount of the increase limited to the average retired worker benefit.

•  Protection for the lowest lifetime earners. The minimum Social Security benefit would equal 125% of the poverty level and indexed to wages rather than prices, as the current minimum benefit does, which “is insufficient“ and “rapidly becoming irrelevant.”

These four changes would add either 14% or 30% to the deficit in Social Security over the next 75 years, depending on which options were chosen to help caregivers and the oldest old, but they could be offset by other changes. CRR suggests a reduction in the benefits of higher earners or their spouses or a modification of the cost of living adjustment for all retirees.

— Check out Social Security Timing: What Couples Should Consider — The Advisor and the Quant on ThinkAdvisor.