454 CHAPTER 14|ECONOMIC AND SOCIAL POLICY
Early retirement at 62 is an option if the retiree is willing to accept a permanently
reduced benefi t level.
A second change, concerning the trust fund, is the source of great confusion and
controversy. The idea behind the trust fund was sound: build up a surplus while the
Boomers are working, and use that money to pay for their retirement. The problem
is that the money wasn’t really saved but went for general government spending
(for example, the war in Afghanistan, food stamps, school loans, and funding the
FBI), and in turn the government gave the Social Security trust fund an IOU in the
form of “special public-debt obligation.” This means that the government will pay
off these IOUs, but the only way it can do so is by increasing taxes, cutting spending
in other areas, or borrowing even more. The trust fund is expected to run out in
2033, at which point the Social Security system will be able to fund only about
75 percent of its obligations.^40
So what is to be done? Dozens of plans have been suggested. There is a surpris-
ing amount of agreement that saving Social Security requires a mixture of benefi t
cuts and tax increases. The calculations get very complicated in terms of the pro-
jected fi scal impact of various reforms, but a mixture of these options would take
care of the long-term fi scal problems of Social Security:^41¾ Raise payroll taxes by 1 percent and increase the income ceiling that is
taxable.
¾ Lower benefi ts for nonworking spouses. Currently nonworking spouses
receive 50 percent of the benefi t of their working spouse. Some proposals
would cut that benefi t to 33 percent.
¾ Index current and future benefi ts to infl ation instead of wages. Currently,
benefi t increases are linked to national average wage increases. Because
infl ation does not increase as fast as wages, linking benefi t increases to
infl ation would generate signifi cant savings.
¾ Gradually raise the retirement age to 70 (by 2030). Changing the retire-
ment age to 70 would save $620 billion by 2040.More controversial proposals include these:¾ Lower benefi ts for wealthier recipients. The strongest argument in favor
of this approach is that wealthy people don’t need the measly couple of
thousand dollars they will receive each month from Social Security. The
main argument against this proposal is that it would end the univer-
sal nature of Social Security and possibly turn it into another welfare
program.
¾ Partial or full privatization of Social Security. This is the main issue
that divides Democrats and Republicans: Democrats favor maintaining
the basic structure of Social Security’s public social insurance system,
and Republicans favor moving part or all of the “pay-as-you-go” system to
private accounts. The central argument in favor of private accounts is that
over the long term, investing in the stock market has historically provided
higher returns than the expected returns from Social Security. Advocates
argue that if everyone were able to take their 6.2 percent payroll tax and
put that in a retirement account, they would have a modest nest egg by the
time they retired that would almost certainly provide a stream of benefi ts
larger than the Social Security check they would receive under the current
system. Democrats point out the problems with this approach—most impor-
tant, the transition costs. Because the current system is “pay-as-you-go,” ifprivatization The process of
transferring the management of a
government program (like Social
Security) from the public sector to
the private sector.