Are retirees 'mooching' off Social Security?

Consider this: A man at age 65 will probably keep breathing until age 82, according to the Social Security actuaries. A woman will hang around until 85.

Do you really deserve a 17-to-20-year vacation spent mooching off government checks, spending money that’s been taxed away from other people who work hard for a living?

If that’s the way you think, then maybe you’ll agree with one proposal for reforming Social Security: Raise the retirement age and trim benefits.

Make the old folks work for a few more years before beginning their long goof-off. If they can’t find work, the heck with them.

Of course, there’s another way to look at it. A middle-aged person today has spent decades paying into a Social Security system that promised retirement at age 66. Is it fair to snatch that promise away?

People of that persuasion might back an alternative solution: Ding the well-off.

Eliminate the $113,700 cap on wages subject to Social Security payroll taxes. That would make the best-paid 6 percent of wage earners unhappy, along with their employers. Employees and employers each pay 6.2 percent of wages into Social Security.

But it would solve 86 to 97 percent of the long-term actuarial deficit for Social Security, without cutting benefits. The difference depends on how much we allow Social Security checks to rise for the well-off.

Benefits are linked to wages, and eliminating the wage cap would entitle million-dollar earners to big Social Security payments. So “scrap the cap” advocates also want to limit the extra payouts.

Of course, that would make the program look a little less like an earned pension and a little more like welfare.

There are other potential fixes being suggested. We could raise the payroll tax rate, with or without raising the cap. We could trim the annual cost-of-living increase, as President Barack Obama suggested. Or we could do a mix of all that.

But we’re going to have to do something — eventually.

Here’s the problem: Social Security is financed by the payroll tax. For nearly three decades, until 2010, the tax brought in more than enough to pay Social Security checks. The government borrowed the surplus and spent it on other things — fighter jets, schools, food stamps, the FBI, whatever.

For every dollar it spent, it put a Treasury IOU into the Social Security Trust fund. There’s no real money in the trust fund — just IOUs.

Now that the wage tax no longer covers the checks, the Social Security Administration has been cashing in those IOUs, and the government has to come up with real money — to the tune of about $50 billion this year — to cover the gap. That number will grow and grow as boomers retire.

The Social Security trust fund will run out of IOUs about 2035. If nothing is done then, the payroll tax will bring in enough to pay only about 77 percent of benefits.

Medicare has an even bigger deficit. As boomers retire, the combined retirement bill will grow until it gobbles up nearly all federal tax revenue by 2025. The government can finance that monster by raising taxes, by borrowing, by cutting benefits, or by squeezing other spending.

Social Security is the smaller problem, so let’s tackle that today.

Merton Bernstein is a retired Washington University law professor who has long studied retirement plans. He supports scrapping the payroll tax cap.

“I’d make it limitless,” says Bernstein, who was principal consultant to the national commission that proposed the last Social Security fix in the early 1980s. “Then I would slowly and very modestly increase the payroll tax rate, which has not been changed since 1990.”

He’d raise it by 1 percent phased in over 20 years. Do that and we could actually raise benefits, not cut them.

However, raising taxes has consequences that are hard to predict. A higher payroll tax would cut corporate profits by raising the cost of labor. Companies might hire engineers in Moscow rather than St. Louis. Your X-ray may be read by a radiologist in New Delhi, leaving Americans with less work.

The Bowles-Simpson federal budget reform commission — formed to suggest a solution to this mess — proposed a spread-the-pain approach with something for everyone to hate. It also would raise more money than the projected shortfall if nothing is done.

The plan would:

• Slowly lift the payroll tax cap to about $190,000, inflation adjusted, by the year 2050. That would close 35 percent of the funding gap.

• Slowly raise the retirement age to 69 by 2075, closing another 18 percent of the hole. There would be a limited exception for people who can’t do their jobs anymore, such as old roofers who can’t climb ladders.

• Trim benefits for middle- and upper-income workers, but add a guaranteed minimum payment at 125 percent of the poverty level. People who turn 85 would get a little extra money to cover medical costs. Combined, that would fill 29 percent of the hole.

• Use a lower measure of inflation, called chained CPI, to adjust payments each year. Checks would rise about 0.3 percent a year more slowly than under the inflation measure used today. That would fill 23 percent of the funding hole.

• Put all state workers in the system, closing 8 percent of the gap, at a big cost to state budgets.

Then-President George W. Bush proposed in 2005 a system of private accounts to partially replace Social Security. In exchange for smaller Social Security checks once they retired, younger workers could invest part of their Social Security taxes in the stock and bond markets. The government would shift part of its risk to individuals, who might do well if smart and lucky.

The plan fell flat in Congress.

Social Security isn’t generous. The average payment is a little less than $15,000 a year. Trim that and we could cause some real suffering for old folks of limited savings. Privatize it and those who don’t understand investments could retire to a dog-food diet.

Bernstein points out that raising the retirement age can be tough on old folks who lose jobs. “Plants shut down and stores close and leave employees behind. It’s cruel to suggest raising the retirement age when there are no jobs,” he says.

By contrast, people making over $113,700 in wages — not counting investment income — aren’t hurting at all. Extending the payroll tax seems like the least painful option.