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Smartly sustain Social Security

Posted November 2

President Franklin D. Roosevelt signed the Social Security act in 1935 to ensure aging generations against disability, economic downturns and declines in health that affect worker productivity. Today, more than 80 years later, Social Security helps lift nearly 15 million elderly Americans above the poverty line. However, it carries significant costs that are becoming increasingly difficult to sustain. In fact, Social Security’s reserves are projected to be depleted by 2034. This raises the unappetizing threat of looming tax hikes to fund a program that is already straining on government spending. Last year, Social Security accounted for nearly a trillion dollars in expenditures, or 24 percent of the federal budget and approximately 5 percent of the country’s GDP.

Economic pressures are partly to blame for these shortfalls, as our nation has yet to fully recover from the worst economic conditions since those that spurred Social Security’s inception. Even as our economy recovers, however, demographic trends pose a more enduring challenge: Our working-age population is shrinking and the beneficiary population is growing and living longer.

Partisan solutions are predictable. The left argues for tax hikes while the right argues for benefit cuts. The reality is that the best approach is a targeted hybrid solution that focuses on addressing some of the root problems plaguing Social Security.

First, just as wages are often indexed to inflation, eligibility ages will need to be indexed to longevity for “life expectancy inflation.” As we live longer, we can also support ourselves without assistance later in life. Today, 12 percent of Americans are 65 or older, but this number is expected to grow to 23 percent by 2080. In this same time span, the working-age population is projected to shrink from 60 to 54 percent. Meanwhile, the average life expectancy is over 77 today, compared with 63 in the FDR era, so the average person today (let alone in the future) will receive benefits significantly longer than was originally planned. While attempting to raise the retirement age can spell political suicide, the voting public might accept age increases that are automatic and gradual.

Second, benefits should be curbed for upper-class elderly, who tend to live longer than the poor and who have generated sufficient income during their working years to independently sustain retirement. This way, Social Security can provide a safety net for those without excess resources. A targeted system could account for earnings, life expectancy and retirement savings and provide benefits to lower earners without raising taxes to support those who don’t need payouts.

Third, we need to harness big data analytics to reduce fraud. In 2013, the Social Security Administration made almost $7 billion in improper payments, largely due to fraud. Now, the 80-year-old Social Security Administration is beginning to tap into the enormous amount of data it has on hand to ensure accurate benefit disbursement and to cut unnecessary costs.

Finally, we need to compartmentalize FICA benefit payouts, which include Medicare and Social Security. Lumping the two together can result in wasteful payouts when retirees require health insurance benefits covered by Medicare, but don’t need the paychecks provided by Social Security. Furthermore, simply treating each program separately would reduce bureaucratic inefficiency and enable more nimble legislative actions for common-sense reform.

Often considered the “third rail of American politics,” the Social Security debate is so emotionally charged and controversial that many politicians avoid discussing the subject entirely. However, failing to act in a smart, forward-thinking, bipartisan manner will only put us further behind the demographic changes of our time. Social Security is an old dog, but it can and must learn a few new tricks to ensure sustainable care for the elderly.

Randy Shumway is the CEO of the Cicero Group and is the economic adviser to Zions Bank.

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