The US Social Security system has been heading toward insolvency for decades, with the program now projected to run a 25% deficit by a little after 2030, according to the Congressional Budget Office. Despite the best efforts of commission after commission, we are no closer to arriving at a solution to the problem. That’s because every proposal is accompanied by significant drawbacks and faces considerable political hurdles.
For problems of this complexity, the Analytic Hierarchy Process (AHP) provides a good way to find a solution and is among a few other mathematical approaches that can help us make better choices. Other approaches have been developed but are not as widely used. I developed the AHP in the 1970s as a structured method for helping people deal with complex decisions based on mathematics and human psychology. It provides a rational framework for structuring the problem, representing and quantifying its elements, relating those elements to overall goals and evaluating alternative courses of action.
During the past 30 years, the AHP method has been applied by me and thousands of others around the world to a broad spectrum of political and economic quandaries. Poland has used it to determine if and when to adopt the euro for its currency. China has used the AHP to decide on the suitability of locations for dams and bridges and whether or not to build them. The National Cancer Institute has used it to prioritize cancer antigens for investment. British Airways has used it to decide on the best entertainment equipment to put in its fleet. And the US government itself has used it in the past in determining, among other things, how to deal with copyright violations in China and whether or not to bomb Iran.
The ideal solution to the Social Security system should ensure that the program survives indefinitely and does not need further significant modifications after the initial fix. Participants should be able to rely on a predictable level of benefits that are adequate to support them in their retirement. Lastly, the program needs to be perceived as fair.
The AHP – and similar methods - is intended to improve decision-making outcomes for problems with many stakeholders, a scarcity of resources, limited data and finite time within which to make a decision – in short, all of the factors that make Social Security reform such an intractable problem. I reviewed 14 alternative solutions, which I narrowed to a list of five deemed the most practical and likely to succeed. A more thorough analysis is required to select the best solution among these alternatives.
Raise the payroll tax ceiling. This plan proposes raising the level of income subject to the 12.4% Social Security withholding tax, split equally between the employer and employee. Currently, any income above $117,000 is not subject to the tax. The cap regularly increases with inflation and will rise to $118,500 in 2015. To increase it sufficiently to help bridge the funding gap, that cap could be lifted in a one-time, large adjustment move or over a series of years. A more draconian approach would be to remove the cap entirely for good.
Raise the retirement age. The normal retirement age, currently about 65 but set to gradually climb to 67 by 2027, has been lifted in the past; a further increase is considered a viable option in the current environment. The life expectancy of Americans continues to climb and is now about 78 years. This increased longevity means the number of people collecting benefits is rising faster than the number paying into the system. As the ratio increases, it places increasing strain on the financial resources of the system. With all other factors held constant, the system will either need to increase revenue or decrease payouts.
Privatize the system. Although there are numerous possible scenarios, a proposal by former President George W Bush was to let certain participants elect to have a third of their payroll tax or 4% of their wages diverted to a private investment account. The program would be voluntary and phased in over a number of years. Lower and higher percentages have also been proposed, but the political viability of this option is poor since the system’s revenues would decline along with the diverted payroll taxes. Some have estimated it would divert US$2 trillion out of the system over 10 years, though there are some proposals that would soften the transition cost.
Reduce the benefits. This alternative can encompass a broad array of tactics. Among the choices are a simple one-time cut in benefits, a temporary freeze in benefit levels or a reduction in future cost of living adjustments. This would curb costs while leaving the withholding ceiling untouched.
Keep the status quo – do nothing. This envisions Social Security is left as it is, with no modifications, whether by choice or political gridlock. Proponents of doing nothing believe that the current system does not require fixing and that some external influences will arise to correct the current deficit, such as an increase in the number of employed or a stronger economy that would yield greater tax revenue. History might suggest this as an alternative, no matter how ill-advised.
How do we plug the growing gap in our Social Security system? What is the most optimal solution? Policy makers have been asking these questions for decades, and although I don’t have the answer, I know that applying a formula such as the Analytic Hierarchy Process to the problem could move us closer to the solution. It could be used by the government as other countries have to grapple with these difficult decisions and come to a rational solution. Unfortunately, the politicians don’t seem interested at the moment