How long can Social Security last?

By U.S. News & World Report

Even as 401k's tanked, home prices plummeted and jobs vanished, more than 50 million Americans went to sleep in the past couple of years assured that at least one of their assets would still be there in the morning: their Social Security checks.

No matter how precipitously the stock market fell, those monthly benefits -- which averaged $1,155 for retired workers -- always turned up. "Social Security is really the gold standard of retirement benefits," says Nancy Altman, the author of "The Battle for Social Security: From FDR's Vision to Bush's Gamble."

Although it might not have been apparent to recipients, the worst recession since World War II has trimmed Social Security's finances. And as millions more Americans become eligible, future and current beneficiaries are left wondering: Just how safe are my Social Security checks?

Shortfall keeps getting closer

America's safety net has been projecting long-term deficits for years, and it's no secret that legions of retiring baby boomers will one day exhaust Social Security's financial surplus. But the recession has exacerbated this trend.

Payroll tax receipts, the program's key source of revenue, have declined considerably during the economic slump, putting a chokehold on Social Security's funding. As a result, the system's break-even date -- when Social Security will begin paying out more in benefits than it takes in through payroll taxes -- has been moved forward by one year, to 2016, in the most recent Social Security trustees report.

What's more, the still-sputtering economy might bump that date forward again in 2010's report. The system will make up the shortfall by dipping into its $2.4 trillion trust fund. (The fund, however, is held in government bonds, not cash. Redeeming the securities might require federal tax increases or spending cuts.)

After the trust fund is exhausted -- which, according to projections, will happen in 2037 -- Social Security will be able to pay out only about three-quarters of its promised benefits through 2083.

No crisis -- yet

Although this prognosis may appear alarming, Virginia Reno of the nonpartisan National Academy of Social Insurance insists that Social Security's books aren't cause for panic.

"There absolutely is no crisis," she says. "There is a shortfall in the long-term finances."

For a genuine Social Security crisis, Reno points to 1983, when the system's finances were so depleted that benefits would have had to have been reduced or delayed within months had Congress not acted. Still, it's clear that Social Security's finances need attention, and the longer reform is put off, the more intrusive the repairs that will need to be made down the road.

"If you hear something wrong in your transmission and you fix it immediately, it may be expensive, but it is a heck of a lot cheaper than when gears start to fly out the back of the car," says David John of the Heritage Foundation, a conservative think tank. "We are at the point right now where the gears aren't flying off, but they are getting close."

Perpetual politics

There's nothing simple about reforming Social Security. Neither President George W. Bush nor President Bill Clinton could get it done. That's because Social Security beneficiaries are a large, politically engaged bloc of voters who aren't crazy about the two main avenues for bringing the system into actuarial balance: cutting benefits or raising taxes.

With President Barack Obama's administration consumed by the rickety economy and an ambitious health care overhaul, the White House is unlikely to take on Social Security reform anytime soon. But Andrew Biggs, a former deputy commissioner of the Social Security Administration, expects Obama to try to tackle reform later in his term.

"It's a big issue, but it's relatively fixable in the sense that it is much more of a mature policy issue than something like health care," says Biggs, a resident scholar at the conservative American Enterprise Institute. "We know the pros and cons. We just have to make our decisions."

Options for a not-so-quick fix

Hammering out a package will pit conservatives, who are more sympathetic to benefit cuts, against liberals, who are more willing to swallow tax increases. "In all likelihood, it will end up being a mix of some benefit reductions and some increases in the taxation," says Douglas Elliott of the liberal Brookings Institution.

It's important to note that any changes to the Social Security system are likely to be phased in at a glacial pace. Congress officially raised the full retirement age to 67 in 1983, for example, but structured the move so that it won't be completely implemented until 2027.

At the same time, lawmakers are loath to slash benefits for current recipients, so anyone currently or soon to be receiving a Social Security check is unlikely to see his or her benefits cut, Biggs says.

Here's a look at some possible ingredients of a Social Security reform package:

Benefit cuts: One factor causing the program's long-term deficits is that Americans are living longer and therefore drawing more benefits over their lifetimes.

Accordingly, raising the retirement age for full benefits is an often-discussed option for reform. "The program is facing a demographic problem that demands a demographic solution," Tom Terry, the vice president for pension issues at the American Academy of Actuaries, said in August 2008.

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The academy pointed out that gradually raising the retirement age by two months per year from 67 to 70 could resolve about half of Social Security's long-term deficit.

In addition, supplanting one Bureau of Labor Statistics' Consumer Price Index with a technical variation, known as the "chained CPI," to calculate cost-of-living adjustments would erase about 18% of the deficit, according to a 2008 report.

Reducing or eliminating benefits for high-income Americans is also an alternative.

Tax increases: Workers fork over payroll taxes -- the 12.4% levy split equally between employees and employers that funds Social Security -- on their first $106,800 of earnings. Wages above that cap aren't subject to the tax. And although the tax was designed to capture 90% of all earnings nationwide, rapid wage increases for high earners have reduced the portion of earnings subject to payroll taxes to about 83%.

In his plan to bring the system back into balance, the late Robert Ball, who served as commissioner of Social Security under three presidents, suggested increasing the cap by an additional 2% a year until the 90% threshold is restored. That would take 36 years to do and could reduce the deficit by about a third.

Although it's quite challenging in the current political environment, simply raising the payroll tax is always an option. A 2% increase would eliminate the long-term deficit altogether.

A new tax dedicated to Social Security also is possible.

Riskier investments: To juice investment returns, Ball also suggested diversifying the Social Security trust fund's holdings. Instead of investing exclusively in ultrasafe but low-yielding government bonds, Ball recommended putting up to 20% of the fund's holdings in a broad-index stock fund.

At the same time, the Heritage Foundation's John supports the establishment of so-called automatic IRAs, or tax-preferred, payroll-deducted retirement savings accounts for employees working for companies that don't offer 401k plans.

This article was reported by Luke Mullins for U.S. News & World Report.

Updated Jan. 29, 2010