Even as it has become a financial lifeline for tens of millions of Americans — for some their sole source of income — the Social Security system has time and again flirted with fiscal catastrophe, morphing into a hot potato demanding decisions that politicians are loathe to make. The most recent (and perhaps the most daunting) crisis played out in the early 1980s, when Social Security came within a few weeks of lacking the cash to pay all its bills.

That catastrophe was avoided when President Ronald Reagan signed legislation in 1983 that put Social Security back on a road to solvency. The byproduct of a remarkable bipartisan effort led by Senators Robert Dole and Daniel Patrick Moynihan, the new law sagely balanced payroll tax increases with trims in benefits as a least painful outcome to which everyone could (grudgingly) agree.

Fast forward to today and Social Security once again faces a looming crisis that has been years in the making. And once again, it’s been back-burnered to the point that it earns no more than a wink and a nod from politicians only too willing to kick the can down the road. But the hard reality is this: the underlying trust fund has reserves to pay full benefits only until 2033. Thereafter, Congress will face three unpalatable choices.

The first is to do nothing and, as required by law, to allow administrators to balance revenues against outlays by cutting benefits 23 percent across the board. The second is to fund the system’s shortfall out of general tax revenues, adding approximately $400 billion annually to a federal budget deficit that is already out of hand. And the third, based on the template of compromise created in 1983, is to mix benefit reductions and revenue enhancers to make Social Security viable for the foreseeable future.

The good news is that, unlike 1983, the next crisis is still almost a decade away. The bad news: because the moment of truth is not imminent, we must rely on Congress’s willingness to take the political heat to provide the ponderous retirement system with a sustainable framework for generations hence.

The Revenue Side

Washington should borrow from the Reagan strategy, laying the groundwork for collective action by naming a distinguished bipartisan panel of lawmakers and technocrats to steer the ship forward. As a technical matter, the problem is not especially challenging. Indeed, the American Academy of Actuaries has identified a series of proposals to strengthen and rebalance Social Security for the decades ahead. By no coincidence, they are divided between benefit reductions and revenue increases, each covering roughly half of the program’s funding deficit.

On the revenue side, raising the 12.4 percent payroll tax by 0.1 percentage point a year starting in 2029 and continuing until it reaches 14.4 percent, would chop 38 percent of the systems projected shortfall. The tax, divided evenly by employer and employee (though most economists believe the burden is ultimately borne by workers), would go up so slowly that many employees would not likely notice. The annual change would reduce monthly take-home pay by $5 for someone earning $60,000 a year.

Another major revenue-driven adjustment that’s been on the radar for years is raising the limit on taxable payroll earnings, now set at $160,200 a year. If the change applied the payroll tax to 90 percent of earnings above that ceiling, the extra revenue would cover another 12 percent of the funding deficit.

The Benefit Side

Making Social Security whole would require an equal dose of benefit reductions, led by increases in the normal retirement age (but leaving the benefits of those already eligible untouched). Though long considered a third-rail issue by politicians, it is not outside the sights of determined fiscal reformers who recognize how critical retirement age is to long-term reform.

Set at 65 years of age when President Franklin Roosevelt signed the Social Security Act into law in 1935, the 1983 fix gradually increased the age to receive full retirement benefits to 67. (A 1961 law allowed workers to receive permanently reduced benefits at age 62.) But since the last adjustment in 1983, the life expectancy of Americans has grown by five years, creating a strong argument for hiking the age at which full benefits flow as well as raising the age at which reduced benefits can be claimed.

To be sure, there is a tradeoff here. Life expectancy is highly correlated with income. So higher-income earners can expect to enjoy Social Security benefits longer. By the same token, raising the retirement age — giving all retirees fewer years of benefits — is regressive. Arguably more important, lower-income workers are more likely to end up in their 60s with jobs that demand substantial physical labor. So injuries and illnesses that reduce physical capacity for work (but may not qualify them for disability insurance) are more likely to leave workers in need before they reach full retirement age.

The American Academy of Actuaries, for its part, has suggested what amounts to a compromise, gradually increasing both the normal retirement age and the minimum age for reduced benefits until the former is 69 and the latter is 64 by 2031. These twin changes would offset the system’s funding deficit by 17 percent.

Two other changes aimed at aligning benefits with fiscal reality seem tailor-made for the Social Security rebalancing act:

• Link the system’s cost-of-living adjustment (COLA) to the Consumer Price Index (CPI). This change would reduce annual COLA increases by approximately 0.3 percent, yielding a 17 percent reduction in the baseline deficit.
• Revise the basic benefit formula by increasing the number of years used to calculate benefits from 35 to 40. This step, which would be phased in over years, would reflect the increases in normal retirement age and life expectancy while reducing the deficit by 12 percent.

Eat Your Spinach

Any effort to reform a system as sprawling and complex as Social Security must start with the premise that no change will be easy for the public to accept, and that compromises will be necessary to get it done. Put another way: everyone should be a little unhappy with the results.

History has shown that the Social Security imbroglio can be untangled, that broad-based reform is achievable when put in the hands of responsible bipartisan leaders who can make the case that change is a bread-and-butter imperative to be kicked down the road at our collective peril.

Above all, the public must be made to understand that denial is simply not a viable strategy. Just as importantly, any politicians who campaign on a platform of unyielding opposition to touching a hair on Social Security’s metaphoric head — let alone tampering with the set-in-stone retirement age — are only deceiving their constituents. Truth is, continued inaction will eventually guarantee a 23 percent cut in benefits in 2034 and continue until new revenues are found or benefit entitlements slashed.

That’s a persuasive argument for acting before Social Security recipients are marching on Washington. The big question is whether elected officials can be persuaded to do their jobs.