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Fixing Social Security: The 'low hanging fruit'

By Jeanne Sahadi, senior writer

NEW YORK (CNNMoney.com) -- Reforming Social Security is still a hot-button issue. But relative to other measures needed to stabilize U.S. debt, it should be a snap.

"They could begin with Social Security, which oddly enough has gone from being the 'third rail of American politics' to the low-hanging fruit," wrote Robert Bixby, director of the Concord Coalition, a nonpartisan, grassroots deficit watchdog group.

While a Social Security fix would cure only a small part of the country's long-term fiscal shortfall, it could pay big dividends in terms of the U.S. standing internationally, deficit hawks say. "It would be a confidence builder with our foreign lenders," said Pete Peterson at a recent fiscal summit organized by his foundation, the Peter G. Peterson Foundation.

That could lessen the risk of a big rise in interest rates and buy the country more time to handle other debt-related issues, such as tax and budget reform and further changes in Medicare.

A report from the Congressional Budget Office in March estimated that starting this year, Social Security will for the first time take in less revenue than it must pay out in benefits.

The Social Security revenue shortfall would last through 2013, then the system would collect a surplus again for two years before permanently going into the red.

When the system takes in less than it has promised to pay out, the government will need to make up the difference by paying back the surplus revenue that has been paid into Social Security over the years, but which Uncle Sam spent on other things.

That surplus -- including the interest owed -- will allow the system to continue paying out 100% of the benefits promised until roughly 2037. After that, the program would only be able to pay out 76% of promised benefits if nothing is done.

Some say that means the problem is still years away. But others think the real problem is now, since the government -- already heavily in debt -- will have to borrow more money starting this decade to pay back the Social Security trust fund unless it cuts spending and raises taxes.

Experts agree Social Security reform will be less painful if it is implemented gradually.

They also agree that changes should not affect current or soon-to-be retirees, and should protect future retirees with low income.

The menu of options for making Social Security solvent is well known.

Increasing the retirement age: One option that gets a lot of buy-in from policy experts is a slow increase in the retirement age at which one may collect full Social Security benefits. Today, it's 66, and it is scheduled to increase to 67 by 2027.

But Social Security experts say that won't keep pace with increases in life expectancy, meaning retirees are likely to be collecting benefits for longer than the system can support.

Increasing the retirement age by just one month every two years starting in the 2020s could fix 20% of the program's shortfall, said Ron Gebhardtsbauer, who teaches actuarial science at Pennsylvania State University and is on the board of the American Academy of Actuaries. It could cure 30% of the shortfall if, in addition, the retirement age were accelerated to 67 over the next six years, he added.

Reducing growth in benefit levels: Another measure that has gotten a lot of attention is "progressive indexing." Such a measure would not affect the promised benefits for lower income workers but would lower future benefits for middle- and high- income workers relative to what is currently promised.

Under progressive indexing, the Social Security benefits of higher-income workers would be indexed to inflation rather than to wages, as is currently the case. That would have the effect of reducing benefits from their current promised levels because inflation tends to grow more slowly than wages.

Raising the payroll tax: There is also the option of increasing the Social Security payroll tax rate on wages or raising the cap on how much of wages is subject to the payroll tax (currently it's the first $106,800).

More than likely, a combination of these measures would be proposed.

While answers have long been listed on the Social Security quiz sheet, the political will to implement them has been missing, Bixby said. "Everyone knows what needs to be done, but no one wants to do it."

Yet faced with mounting challenges on the federal balance sheet and a dicey debt environment, that may change soon enough. To top of page

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