Options for fixing Social Security all involve pain for someone

A $4 trillion hole will need to be filled so Social Security can stay solvent for the next 75 years, regardless of the fate of the suggested private accounts.

At some point, presumably, lawmakers will address the system’s long-term financial woes.

As it stands now, the system by 2017 will begin paying out more in benefits than it collects in taxes. By 2041, it will have exhausted its reserves and be able to pay 74 percent of benefits, according to the program’s trustees.

Most options involve cutting benefits, raising taxes or a combination of both. A look at some of them, how far they would go toward ensuring solvency and their effect on people:

OPTION: Raise Social Security taxes.

HOW IT WORKS: Employers and employees each contribute 6.2 percent of the employee’s wages up to $90,000 a year.

HOW IT COULD CHANGE: That rate could be increased.

HOW MUCH IT WOULD SAVE: If employer and employee each paid in 7.2 percent, that would fill 104 percent of the gap.

BEST CASE FOR: Benefits would not have to be cut.

BEST CASE AGAINST: Could discourage employers from hiring. The tax is regressive, in that the rate is the same for people no matter how much they earn.

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OPTION: Tax earnings above $90,000 per year.

HOW IT WORKS: Under the current system, most but not all income is taxed. In 2005, Social Security taxes were levied only on earnings up to $90,000 — a number that rises with inflation. About 6 percent of workers earn more than $90,000.

HOW IT MIGHT CHANGE: The $90,000 cap could be raised or eliminated altogether. Currently, retirement benefits are based on how much workers paid into the system. If Congress raised the tax cap, it could increase benefits to match the increased taxes, or it could raise the taxes without increasing benefits. Lawmakers could also leave the cap at $90,000 but increase taxes for earnings over, for example, $200,000.

HOW MUCH IT WOULD SAVE: Eliminating the cap without raising benefits to match the increase taxes for high-income workers would raise more than needed to make the system solvent for 75 years, plugging 116 percent of the hole.

Eliminating the cap but raising benefits to match would plug 93 percent of the gap.

Raising the cap to about $145,000 and increasing benefits for those paying more payroll taxes would fill 40 percent of the gap.

BEST CASE FOR: People earning less than $90,000 have to pay taxes on all their earnings, so why should not wealthier people have to do the same? The share of wages that are not subject to taxation is growing because of disproportionate gains among high earners. Polls show taxing the rich is one of the few fixes the public supports.

BEST CASE AGAINST: It could discourage hiring because half the tax is paid by employers, and the self-employed must pay both parts. The system is already skewed against upper-income people, who get back a smaller share of their contributions than lower-income retirees do.

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OPTION: Raise the retirement age.

HOW IT WORKS NOW: Retirement age is now 65 1/2, slowly rising to 67. Workers can retire as early as age 62 but with reduced benefits.

HOW IT COULD CHANGE: Under one version, the retirement age would rise faster, and eventually reach 68. Under a second plan, the retirement age would eventually reach 70.

HOW MUCH IT WOULD SAVE: The first version would plug 28 percent of the gap; the second, 36 percent.

BEST CASE FOR: People are living longer and therefore can reasonably be expected to work longer. Workers still could retire early, but with even lower benefits.

BEST CASE AGAINST: Many jobs involve work that is hard on the body and cannot easily be done by older people.

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OPTION: Reduce payments by changing the formula used to calculate initial benefits.

HOW IT WORKS: Benefits are set based on a complicated formula that takes into account how much money a worker made each year. Earnings from past years are adjusted to current dollars based on the rate at which wages have increased. This is called wage indexing.

HOW IT COULD CHANGE: Adjust annual wages based on the rate at which prices have risen, known as price indexing. Because prices rise more slowly than wages, benefits would fall. If this option were fully put in place, benefits would be 46 percent lower. An alternative would be to make this change for upper-income workers, phase it in for those in the middle, and keep benefits the same for those at the bottom.

HOW MUCH IT WOULD SAVE: Changing the system for everyone would more than fill the gap, raising 111 percent of needed cash.

BEST CASE FOR: Price indexing for all eliminates the long-term deficit. Cutting benefits but only for those who have more money would keep the system intact for those who need it the most.

BEST CASE AGAINST: Using the wage index allows workers’ retirement benefits to remain comparable to what working people are earning. If there is no minimum benefit, some low-income retirees would fall below the poverty line.

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OPTION: Curtail annual cost-of-living benefit increases.

HOW IT WORKS: Once initial benefits are set, they rise each year with the consumer price index to keep pace with inflation.

HOW IT COULD CHANGE: The annual increase could be reduced by using an alternate measure of inflation, which would reduce annual increases by about 0.22 percent.

HOW MUCH IT WOULD SAVE: Fills about 15 percent of the gap.

BEST CASE FOR: Critics say the index overstates the impact of inflation on the actual cost of living because it fails to take into account consumer behavior changes as a result of higher prices.

BEST CASE AGAINST: Has a significant effect on people living the longest, who are hit each year with a smaller increase.

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OPTION: Reduce benefits as life expectancy rises.

HOW IT WORKS: The current formula for setting benefits does not take into account the fact that people are living longer.

HOW IT COULD CHANGE: The benefit formula could be configured to cut payments for each new class of retirees as life expectancy for their age group rises.

HOW MUCH IT MIGHT SAVE: Depending on the formula change, it could fill 25 percent to 50 percent of the gap.

BEST CASE FOR: Rising life expectancy is one of the main reasons that Social Security faces financial problems. A change in formula would acknowledge that dynamic.

BEST CASE AGAINST: It cuts benefits across the board.

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OPTION: Bring state and local workers into Social Security.

HOW IT WORKS: About 25 percent of state and local employees are covered by alternative pension systems.

HOW IT COULD CHANGE: The government could require new state and local workers to enroll in Social Security.

HOW MUCH IT WOULD SAVE: About 10 percent of the gap would be plugged.

BEST CASE FOR: Would provide a seamless retirement system for people who change jobs and make Social Security closer to a universal system.

BEST CASE AGAINST: State and local governments would have to reconfigure pension systems to fit with Social Security. Unions and workers are opposed because they believe their benefits would not be as good.

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OPTION: Invest a portion of the Social Security trust fund in the stock market.

HOW IT WORKS: The Social Security trust fund is now invested in Treasury bonds, which have almost no risk but a low rate of return.

HOW IT COULD CHANGE: Rather than give individual workers the power to invest their money in stocks, the government could invest part — 15 percent, for instance — of the trust fund in equities.

HOW MUCH IT WOULD SAVE: If 15 percent of trust fund were invested, 15 percent of the gap could be filled, depending on returns.

BEST CASE FOR: Stocks have historically done better than government bonds over the long term. If government does the investing, no individual bears personal risk.

BEST CASE AGAINST: The government could face conflicts of interest. Consider a Justice Department lawsuit against a company where Social Security dollars were invested. It also could lead to efforts to restrict investment for political reasons, such as barring holdings in tobacco companies. Because the money in the “trust fund” is being used for other government purposes, Congress would have to come up with the money to repay it in order to invest those dollars in stocks.

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EDITOR’S NOTE — Estimates of the savings various proposals would generate come from a February report by Social Security Administration actuaries and from an analysis by the nonpartisan National Academy of Social Insurance.