“I also believe that there’s real bipartisan backing for improving retirement savings. But it will take time, and patient educational and lobbying work to make progress. As to Social Security, making the system solvent is an easy challenge economically and arithmetically -- but it remains a huge challenge politically and will require presidential leadership and a bipartisan willingness to compromise.’’
To help make Social Security solvent, Reynolds recommends in his book that the dollar amount of wages on which the Social Security tax is assessed be raised so that 90 percent of aggregate U.S. wages is subject to the tax. This year, the maximum amount of a worker's earnings subject to the Social Security tax is $127,200. But the rise in income inequality, according to Investopedia, has resulted in the proportion of the nation’s income subject to the tax falling to 82.7 percent in 2014.
"Until the 1990s, that ceiling (on wages) reached 90 percent of all wages,” Reynolds writes. “We should move back up to that 90 percent level by 2020 and should index the ceiling to future wage gains. This reflects the income gains that the most successful Americans have seen in the past generation.''
Reynolds also proposes a rise in Social Security’s full-benefit retirement age from 67 to 68 by 2030, then indexing the full-benefit age for future generations to gains in longevity. Reynolds tells Financial Advisor: “Once we lifted the full benefit age to 68 -- gradually and over time -- future increases in the full benefit age could be directly related to future increases in life expectancy, year-by year as new longevity data come in.’’
He also maintained that basing the annual Social Security cost-of-living adjustment on the revised CPI would result in increases more directly tied to retiree living expenses. “Social Security benefits are now indexed to wages, which most often grow slightly faster than consumer prices do,” he said. “Linking future benefit increases to the CPI would thus slightly slow their growth.’’
To counter widespread misinformation about Social Security and pensions, Reynolds told Financial Advisor that he favors more education at an earlier age. “I think courses that teach financial literacy, budgeting and lifetime investment strategies would be valuable to incorporate in high school, and perhaps even in grade school curricula across the country. People need to know the cost of credit card debt, the difference between stocks and bonds, and have some idea of the amounts they will need to save to retire comfortably.’’
Although Social Security can be made solvent, Reynolds admits there is resistance to any changes. “Social Security is the vital baseline for Americans' retirement security. It’s critical to low and moderate income workers and valuable even for mass affluent and wealthy people. That makes it a very sensitive topic -- subject to intense political pressures. It can -- and should -- be made solvent by a fair combination of added revenues and slower growth in future benefits. But that calls for sacrifice, which is never popular. So we’re going to need presidential leadership and a bipartisan willingness to compromise – no easy things to achieve.
“The key point to remember is that if we don’t shore it up, benefits will drop by nearly 25% in the early 2030s. And the longer we wait to act – the more painful the sacrifices we need to make will be. Time is not on our side.’’
From Here to Security, by Robert L. Reynolds, Lenny Glynn and John Mitchem. McGraw-Hill. 251 pages. $28.00.
Eleanor O’Sullivan is an award-winning freelance journalist who writes for Financial Advisor magazine.