Third in a series

In January of 1940 Ida May Fuller, 65, of Ludlow, Vt., received the first monthly Social Security paycheck, for $22.54. She had, over the previous three years, paid in a total of $24.75. When she died, at the age of 100, she had collected $22,888.92.

Fuller's story illustrates the problems Social Security faces: She lived far longer than anyone would have predicted when Social Security was created in 1935. She collected based almost entirely on paycheck deductions from younger generations, rather than their own contributions. That has always been the case, and while recipients might love to claim they "paid for their Social Security," they didn't exactly. They paid for their parents' and grandparents' Social Security, and need their offspring to return the favor. And she had no children, producing no future generations of workers to fund her benefits.

Social Security is the most beloved of America's "entitlements," programs that keep the elderly, poor and disabled alive, but it accounts for 20 percent of all federal spending. Its stabilization is crucial to the nation's financial future.

Last year, thanks to the recession, Social Security paid out more than it took in for the first time ever. The program had been projected to maintain positive cash flow until 2017. It's still expected to return to taking in more than it pays out soon, but will go negative for good in a decade and go bust entirely in 2037, absent changes. When the Social Security Trust Fund goes broke, revenue from current workers should allow it to pay about 78 percent of scheduled benefits.

But that's not enough. As pensions disappear, Social Security has become the primary retirement support for many. About one-third of retirees get 90 percent or more of their income from the program. It must be saved and even, in a creative and individually funded manner, expanded, not allowed to dissipate.


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Time for an adjustment

People are living and collecting benefits longer than the program's design allowed for. And they aren't having enough kids to join the workforce and fund their retirement benefits.

But of the issues facing the nation, Social Security is in many ways the easiest to tackle. It presents predictable obligations and has enough funding cushion to give us time to shore it up. What's more, the program has a history of occasional overhauls, the most recent by Ronald Reagan in 1983.

So it's time for another tweak, before the problems get so serious that tweaks won't do the trick.

Raising the retirement age beyond the current 67 is an oft-cited solution, and it's reasonable, but it's got to be done carefully. Many people aren't capable of full-time work at 67, particularly in physically demanding occupations. The retirement age has already increased for those now nearly ready to leave the workforce. It should continue to increase, gradually, for people more than 25 years from collecting who have plenty of time to plan for it and are likely to live even longer and more active lives. But as these age limits increase, we must ensure the system is geared to the fact that many of these elderly workers will be unable to toil full time, and must have access to benefits earlier.

Another suggestion that will work is changing the way Social Security cost-of-living adjustments are figured to more accurately match the rate at which senior spending actually increases. The idea is called "chained Consumer Price Index," and it's based on the notion that as some prices increase, seniors will in some cases buy lesser goods and services rather than spending more. In a perfect world we'd oppose this, saying retirees should never have to switch from beef to beans because of reduced benefits. In this world, every American will have to sacrifice, so we advocate adopting this method over 10 years. Seniors will continue to get increases but they will slow a bit over time, leading to large savings for the program but small losses for individuals.

We also need to raise the payroll deductions cap from the 2012 income level of $110,000 to $220,000. That would mean people earning $200,000 would no longer see their take-home pay go up a few percentage points in July. This move alone would make up almost 40 percent of the shortfall in Social Security funding. It would also cost businesses with well- paid employees more in payroll taxes, but that's one of the trade-offs.

The rest of the shortfall should come from an increase in the payroll taxes that funds the program, now 6.2 percent each from employers and employees, to 7 percent each.

These moves would bring the fund back into balance for the foreseeable future, but even more can be done to improve the lives of retirees, allowing them to adjust to these planned changes, and at no cost to the government.

The idea is Social Security Plus, in which workers could contribute to a 401(k)-style program via direct paycheck contributions to the Social Security Administration. The program would be opt-out, not opt-in (a huge difference according to behaviorists), would offer a variety of investments and act as a form of the privatized Social Security that conservatives have touted for years -- supplementing, not gutting the program that provides a baseline level of income for retirees.

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Why it works -- popular support

Social Security has always faced adjustments as our demographics changed, but it's also become an increasing part of retiree income. Plans that stabilize the program by abruptly cutting the quality of life for seniors aren't going to be supported, and shouldn't be. Additionally, retirement ages quickly reaching 70 or above are inappropriate for many, if not most.

Plans like means testing -- essentially, depriving well-off retirees who paid into the system from collecting benefits -- are a bad idea. The collective nature of Social Security has always been both its strength and appeal. Since we all identify with it, the program has been impervious to political attack.

Social Security is important and popular. It's not hard to save, but it would be devastating to this country to see it founder. It simply needs to be paid for by the workers who, in their turn, will enjoy the benefit themselves, and with these few tweaks, that won't be a problem.

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Coming up in the Balancing Act series:


Taxing and spending:

Imagining a fair and simple tax system for the nation.


Plugging the loopholes: Tax breaks are costing $1.1 trillion a year -- money that could help solve the nation's fiscal problems. But realistic tax reform could fix this.

FRIDAY, Nov. 18

Super solutions: Why the congressional supercommittee needs to cut entitlements and eliminate tax breaks.


What it means for you: There are no easy answers, but if all are willing to give up something, a lot can be gained, including a nation returned to solvency.