The golden trade-off

If raising the retirement age can save Social Security, the nation owes huge thanks to Ronald Reagan and Alan Greenspan. They raised it a generation ago, and retiring at 65 with full benefits is now history.

The rise to age 66, where it is today — and a scheduled change to 67 — were buried in plain sight in the Social Security overhaul of 1983. President Reagan had set up a commission — chaired by Greenspan, before he became a household name as head of the Federal Reserve — to put the system on sound fiscal footing. The panel became a model of bipartisanship, something almost unthinkable in today’s Washington. Its report formed the core of a bill that Congress approved overwhelmingly.

The bill raised the retirement age by two months a year for anyone turning 62 from the year 2000 through 2005. As a result, the age for retiring with full benefits reached 66 starting in 2009. It will stay at 66 through 2016. Then, for those turning 62 from 2017 to 2022, the age goes up again at the rate of two months a year. For anyone born in 1960 or later, it will mean a full-benefit retirement age of 67. And that’s as far as the law goes.

To recap: 65 is toast, 66 is the new 65 and 67 arrives in 2027 — unless Washington decides to revisit a classic political compromise.

How Congress can save Social Security

The lawmakers of 1983 signed away two of the golden years, but they could have also called it a golden trade-off. They acted like adults to shore up the system. The reform also taxed benefits for the first time and sent the revenues to the Social Security trust fund, which will pay future retirees. The tax applied to half of the recipient’s total, and it was structured to exempt those below a certain income who were most reliant on Social Security. In 1993, President Clinton signed an omnibus budget bill that raised the portion of benefits subject to taxes to 85%. That change also included an income threshold that restricted the levy to better-off beneficiaries.

With the health of Social Security again at issue, there’s good reason to make 100% of benefits taxable. The levy on the last 15% could apply to taxable incomes of, say, $200,000 or more, with low-income recipients continuing to pay no tax on their benefits. The new threshold could also be set to far exceed the current one ($44,000 for joint filers), thus exempting most middle-class families from paying.

In the spirit of ‘83, Congress could also eliminate or at least raise the cap on the amount of salary subject to the payroll tax. Most workers pay the tax all year long, on every dollar they make, but not high earners. For them the tax stops at a given income, which in 2012 is $110,100. Those making more in effect pay Social Security tax at a lower rate. Someone earning $220,200, for example, will pay at half the rate of those earning $110,100 or less.

Like many Americans today, the Social Security payroll tax is, in effect, working two jobs to make ends meet. The tax has always paid the bill for current beneficiaries. Through a series of hikes beginning in the late 1970s, it took on a second job: building up the trust fund for the coming wave of baby boomer recipients. Besides paying current benefits, workers for years essentially have been prepaying toward boomer benefits. By law, an increase in average wages triggers a like increase in the salary cap. Wages have risen, but high-end incomes have soared, so raising the cap is the very least we should do.

Social Security shows America at its caring best. It’s embraced by people of every stripe and pinstripe, left and right, coast to coast. The number crunchers can calculate the system’s benefit projections and revenue needs. Then it will be up to Congress to do the right, bipartisan, thing.

Another Congress long ago bumped up the retirement age. If Social Security needs more sacrifice to keep it secure for future generations, plain fairness says the additional revenue should come from the top.

Gerald E. Scorse writes about taxes.