Column: AARP head talks Social Security solvency
AARP president Robert Romasco stopped by the Daily Mail last week to talk about the need to reform Social Security and Medicare, but in a way avoids hurting already cash-strapped seniors.
Romasco's immediate concern is President Barack Obama's proposal to switch the government's current measure - the Consumer Price Index, or CPI - to the so-called chained CPI, which rises more slowly resulting in reduced cost-of-living adjustments for beneficiaries.
Rather than using this actuarial slight of hand to get a temporary fix, Romasco said leaders needed to look at alternatives to make the system solvent in the long run.
One option discussed was raising the income cap for Social Security taxes, which adjusts with average wage rates each year.
For 2013, the 12.4 percent Social Security tax (6.2 percent paid by employees, the rest paid by the employer) is being collected against the first $113,700 of a person's income.
This structure has led people to criticize Social Security as a regressive tax, since wealthier people end up paying a much smaller portion of their income than those who make less.
The counterpoint is that wealthier people are less likely to rely on Social Security later in life, since they usually invest for retirement on their own.
But for argument's sake, what effect could a cap change have on the future of the program?
The Congressional Research Service examined this in a 2010 report for the U.S. Senate Special Committee on Aging.
The report found while the cap adjusts each year with wages, rising income inequality has cut the amount of national income it covers, falling from 90 percent of earnings in 1982, to 85 percent in 2005.
The report found that raising the cap to once again cover 90 percent of all earnings - about $172,000 at the time - would only cover about 43 percent of the projected Social Security shortfall over the next 75 years. To make up the gap, payroll taxes would have to increase to a total of 13.49 percent.
A second option would be to completely eliminate the cap and tax all income.
Because benefits are calculated based on what a person paid into the system, this would result in larger benefits payments to wealthier people. For example, someone paying taxes on $400,000 a year would reap $72,000 in annual benefits in retirement.
In spite of that, the report found that 95 percent of Social Security's projected shortfall would be covered under this plan. Raising payroll taxes to 12.5 percent would ensure complete solvency over the next 75 years.
Finally, the report found that if Congress eliminated the tax cap, but said additional income taxed would not count toward additional benefits in retirement, the system would not only be fully funded over the next 75 years, but actually collect 15 percent more than it needed.
As a result, the current payroll tax rate could be trimmed to 12.12 percent and still keep the system solvent.
Because no one seemed to pay attention to scenarios laid out in the report in 2010, it's not likely anyone in Congress will it up this year. But it would still help to keep in mind that there are alternatives to just raising the current tax rates or cutting benefits for retirees.