5 Intriguing (and Less Painful) Fixes for Social Security

There's widespread worry about the long-term solvency of Social Security. The potential remedies we hear the most about aren't pretty: ratcheting up the age at which we can begin to collect our expected payments, reducing those expected payments, or raising the tax rate at which we all pay into the system.

Fortunately, those aren't the only options. Some more creative solutions hold a lot of promise.

Here are five creative alternative solutions that have been proposed:

1. Raise (or eliminate!) the income limit for the payroll tax. Right now, any income you earn above roughly $110,000 is not taxed for Social Security. So those earning $50,000 or $80,000 face a sizable tax hit, proportionally speaking, while those earning, say, $300,000 or $3 million are only taxed on a small portion of their earnings. Taxing more of the income generated by wealthier Americans and Social Security's coffers will fill faster. It seems fair, too: Why should most Americans have all of their income subject to the tax, while a lucky few have only a fraction of it taxed?

2. Have a means test for beneficiaries. The idea of reduced benefits is scary to the many millions who will rely on Social Security as a critical contributor to their retirement income. But what if we rethink the Social Security mission, so that it's a safety net only for those who need it, funded by all workers? In other words, benefits might only go to those who pass a means test. Yes, that means that many people who were looking forward to the program providing them some extra income in retirement might not get it -- but it would only be those who already have plenty to live on.

3. Offer customizable benefit schedules. Writing for Bloomberg News, Jerome Golden has suggested permitting retirees to decide what kind of benefit structure will serve them best. For example, someone who wants to keep working until age 75, but who will be scaling back his hours over time, would be able to set his benefits to gradually increase over time. Someone else who's most worried about the cost of long-term care might accept lower benefits in her early retirement years, letting extra funds accumulate to be available later. He explains that "this reform would not reduce the current value of anyone's promised benefits; it would only reduce the system's cash outflow in the near term, buying time for the demographics to work through the system."

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4. Include more workers. A 2010 report from the Senate's Special Committee on Aging suggested, among other options, including more workers. Right now, some workers, such as state and local government employees who are covered by other plans, are not part of the system. If they were, they'd eventually draw benefits, but until then, they'd be contributing Social Security taxes. This might appeal to more people now than a decade ago, as many financially strapped governments have been looking into reducing benefits for retirees.

5. Invest assets more aggressively. The report above also offered this suggestion: Invest some of Social Security's money in more aggressive ways, such as in stocks. This could be effective, but it does add risk. It wouldn't necessarily be a lot of risk, though. After all, studies have shown that over the long haul, stocks almost always beat bonds.

Privatizing Social Security: A Red Herring

One other "creative" solution that has been raised frequently is essentially privatizing Social Security. Proponents propose letting us invest some or all of the money earmarked for us on our own, choosing the investments we want. The concept has its appeal: Sensible and effective investors could grow their ultimate payouts to levels significantly better than they would have received under the current system.

But the downsides are deeply worrying -- and the more you learn about them, the more you may favor the five potential fixes above.

For starters, as designed, Social Security offers a guaranteed income in retirement, adjusted for inflation. It's hard to beat that kind of peace of mind. Yes, investing on your own in stocks can reap rewards, but it's not without risk.

The other major problem with privatization is that most Americans are not well-equipped to manage their own investments. In 2009, a Financial Finesse survey found that :

• 86% of employed Americans say they have no idea whether or not they are on track to retire comfortably.

• 53% say they don't have a basic knowledge of stocks, bonds, and mutual funds.

• 73% aren't sure if their portfolio's asset allocation makes sense, given their risk tolerance and time horizon.

• 43% spend more than they make each month.

• 62% don't have an emergency cash fund.

• 23% don't pay their bills on time each month.

Given those numbers, it seems silly to suggest yanking a guaranteed safety net out from under these folks and force them to try to earn profits in the markets.

Fortunately, we're not stuck having to decide between one or two painful choices. There are many possible ways to improve the health of the Social Security program, or to close its deficits entirely. Even some of the options that sound most painful may not be as bad as they seem. For instance, requiring most Americans to delay retirement by a few years is a big deal -- but upping the Social Security tax rate from 6.2% to 7.3% would cost someone who earns $45,000 just $495 extra a year. That's not pleasant, but it's far less frightening.

So don't despair -- and don't let your representatives in Washington make poor decisions, either. Consider sharing the ideas you like with your elected representatives.