Averting the Crisis in Social Security

The Social Security crisis -- the troubling projection that the nation’s cornerstone retirement system will run out of cash just as the baby boomers begin to retire -- could have a dramatic effect on the retirement plans of American workers.

In a report issued this month, the retirement system’s trustees said Social Security’s long-term prognosis was getting worse.

Although the system isn’t expected to start paying out more in benefits than it will receive in tax revenue until 2018 -- a year later than previous projections -- it will fall further into the red than previously predicted, the report found. If nothing is done, the system’s trust fund would be depleted by 2042 and benefits would have to be cut by more than 25%.

Currently, two-thirds of retirees count on Social Security to provide more than half their monthly income. For about 20% of retirees, Social Security is their only income.

Naturally, a significant cut in future benefits could have a drastic effect on those relying on the system for a large portion of their retirement security.

Rosy Projections?

Indeed, the trustees’ report may serve as fair warning that the annual projections that Social Security sends to every worker may be painting far too rosy a picture, especially for those with several decades before retirement.

Some analysts argue that the crisis point is really only 15 years away, not 40. Beginning in 2018, when Social Security taxes will be insufficient to pay benefits, the government will be faced with three options: Cut other programs to free up money for Social Security, raise tax revenues, or reduce payments to Social Security recipients.

“By 2018, the shortfall will be as big as Head Start and the supplemental nutrition program for women, infants and children,” said Michael Tanner, director of the Social Security Choice project at the Cato Institute in Washington. “By 2022, it would loom as large as the Departments of Commerce, the Interior and the Environmental Protection Agency. By 2027, you’d have to throw in NASA and the Department of Veterans Affairs.

“And you keep going from there,” he said.

But that fiscal nightmare would occur only if nothing is done. If Americans act now, the solutions can be incremental and gradual, giving everyone plenty of time to adjust, said David Certner, legislative analyst for AARP, formerly known as the American Assn. of Retired Persons.

“If you are trying to get to solvency, you have to either reduce benefits or increase the revenues going into the system,” Certner said. “The sooner we make these changes, the more modest and gradual they can be.”

The Social Security debate has taken a back seat to pressing national problems, from war to the economy, Certner said. Thus, many Americans are unaware of potential solutions at a time when those solutions would prove far less painful than they are likely to be a decade from now.

Indeed, there are more than a dozen plans -- many of them involving relatively small changes -- that could resolve all or a portion of the shortfall, said Anna Rappaport, a retirement expert with Mercer Human Resource Consulting. By cobbling several together, policymakers could avoid a massive overhaul of the system, she said.

“What you have to do is think about combinations of things,” Rappaport said. “You may have to make four or five different adjustments to get to the right amount of savings.”

What’s in the realm of possibility? The American Academy of Actuaries has examined about a dozen of the options, logged their pros and cons and estimated their effects on the Social Security shortfall.

Range of Options

Some of the ideas go a long way toward addressing the solvency crisis on their own, whereas others would need to be combined with two, three or more options to come up with sufficient savings.

Among these ideas:

* Reduce benefits for those whose total retirement income exceeds $45,000 annually -- an option that could get the system 85% closer to balance.

* Eliminate the cap on wages subject to Social Security taxes, a change that could resolve three-quarters of the shortfall. Or simply raise the cap, which would resolve about one-quarter of the shortfall.

* Reduce cost-of-living adjustments by 0.5 percentage point. The effect: Social Security would get about 37% closer to solvency.

* Reduce benefits for future retirees by 5%.

* Index the “normal retirement age” to correspond to longer life spans. In other words, as average life spans rise by a year, move the retirement age up a year, from, say, 67 to 68. This would be an automatic annual adjustment, much as cost-of- living adjustments are made to payments each year.

Naturally, there are positives and negatives to every option, many of which are spelled out on the actuaries’ Web site at www .actuary.org. The actuaries even offer a game that allows visitors to mix and match the solutions they prefer and see whether those choices would bring the system to solvency.

“There are trade-offs, and we really haven’t had the discussion about which trade-offs we want to make,” Certner said. “Do you want your retirement age to be a year or two later, or your benefit to be a little lower, or do you want to put more into the system now? We need to answer some of these questions before we can put a package together that will have some support.”

Times staff writer Kathy M. Kristof, author of “Investing 101” (Bloomberg Press, 2000), welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes .com. For past Personal Finance columns, visit The Times’ Web site at www.latimes.com/perfin.