4 changes that may be in store for Social Security

Social Security cards on money

Between now and next year's election, we're going to hear a lot about "fixing" Social Security.

Which raises the intriguing question: Is it broken?

The answer is "yes" -- 25 years from now, it won't have enough money to pay all of the benefits it has promised the retired and disabled.

But it's certainly not beyond repair.

Social Security faced a similar shortfall when President Ronald Reagan directed an overhaul that's kept the system working just fine for the past 30 years.

The new crisis is caused by the baby boomers' imminent retirement. In four or five years, Social Security will begin paying out more in benefits than it's taking in in payroll taxes.

By 2037, the savings that have been built up in anticipation of just this demographic will be exhausted, and Social Security could only pay out as much money as it collects each year.

That would require benefits to be cut by about 25% if no changes are made before then.

So what can be done?

Here's a look at four possible solutions that are being discussed to keep Social Security solvent over the next century.

It's not hard to imagine some version of the first three being put into action.

Possibility 1. Pay a smaller cost-of-living adjustment.

Social Security benefits are boosted each year to keep up with the Consumer Price Index.

But some budget cutters have suggested switching to another inflation gauge that they argue is a more accurate gauge of our true spending habits, the "chained" CPI.

First published by the Bureau of Labor Statistics in 2002, it's supposed to reflect what real-life consumers do when a product or service gets more expensive: They buy less of it or find a cheaper brand or find something different or go without.

Replacing the CPI with the chained CPI would reduce Social Security's cost-of-living adjustment by about 0.3 percentage points a year.

That may not sound like much, but over the course of 20 years, it means monthly benefits could be about 6.5% lower.

Instead of receiving $1,800 a month, you might only be paid $1,683. Over the course of an entire year, that would reduce benefits by $1,400.

Possibility 2. Make workers wait longer to collect.

Raising the retirement age is a part of many proposals -- and it's a tried-and-true way to cut costs.

When Social Security was created, all recipients qualified for full benefits when they reached 65 years old.

But when Reagan and Congress dealt with the last shortfall in the early '80s, it gradually raised the retirement age for everyone born after 1937.

It's now a maximum of 67 years old for all recipients born after 1959, and budget cutters are proposing to increase the full retirement age to 69 or 70 by 2027 to 2032.

Early retirement age, the age at which you can receive reduced benefits, would be raised from 62 to 64 or 65 under most plans.

Possibility 3. Make high-income workers pay more into the system.

Everyone pays Social Security taxes on their income, up to a slowly but steadily rising limit or cap -- $106,800 at the moment.

As recently as the 1980s, that income cap allowed the government to tax up to 90% of all wages.

But faster-than-expected growth in high-wage jobs has left the government taxing only 86% of all wages today, and the pool of taxable income is expected to be less than 83% by 2020.

Any number of proposals would raise the limit more quickly to subject more of those high salaries to Social Security taxes.

Take, for example, a bipartisan budget-balancing panel called the National Committee on Fiscal Responsibility and Reform that was appointed by President Barack Obama and chaired by former Sens. Alan Simpson and Erskine Bowles.

It proposed increasing the limit to $190,000 by 2020, rather than the $168,000 called for under current law, and to continue raising the cap so that 90% of all wages are taxable again by 2050.

Possibility 4. Privatize the system.

This is the most radical solution.

It's based on the long-standing dislike conservatives have for Social Security as a government-mandated redistribution of wealth.

They just don't think it's right to force workers in their 20s or 30s to support millions of retirees who often collect far more in benefits than they paid into the system when they were employed.

And let's be clear.

Social Security has run a surplus the past couple of decades, thanks to the baby boomers, stashing the extra in Treasury bonds to cover some of the extraordinary cost of their retirement.

But fundamentally, it's a pay-as-you-go system that expects younger generations to pay taxes that are used to provide benefits for the elderly.

Proposals to privatize Social Security usually seek to turn it into a system of mandatory savings accounts, so that the tax money workers put in would be used to pay their benefits -- and only their benefits -- when they retire.

A few programs, such as the ones Republican presidential candidates are talking about, already exist.

One, for example, was created for public employees in Galveston County, Texas, and offers some insight into how it could work.

Employees there contribute 13.9% of their gross pay (6.1% from the employee, 7.8% from the county) to a private account that they can invest much like most of us do with 401(k) plans.

At retirement, they can take the money in a lump sum, monthly payments or by purchasing a lifetime annuity.

We'll let others argue who would come out ahead and who would suffer from such a huge change in how Social Security works.

It's not a new idea, and the odds of such a change being enacted are long, even if Republicans have a successful 2012 election year.

Social Security is one of the most popular government programs ever. Perhaps the most popular government program ever.

But you're still going to hear a lot about this.

Conservatives consider their opposition to be a matter of principle, and there's a shift in demographics that can't be ignored.

What worked back in 1950, when there were 16 workers for every retired or disabled American receiving benefits, will need some updating for a new era when there are only three workers for every recipient.

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