The Social Security ledger is moving in the wrong direction, with the program paying out more than it collects and drawing down reserves. Of course, the reserves are finite and will eventually be depleted.
If current projections hold, Social Security’s principal retirement trust fund will exhaust its reserves in the early 2030s. That doesn’t necessarily mean Social Security will suddenly have no money, since payroll taxes would keep coming in. But without congressional action, incoming revenue would cover only about three-quarters of scheduled benefits.
Social Security Check. Image Credit: Creative Commons.
Social Security Check. Image Credit: Creative Commons.
This means automatic, across-the-board benefit reductions would occur, likely around 20 percent or more. The problem isn’t new, however; it hasn’t snuck up on Congress. Everyone has known this was developing for decades, but has repeatedly postponed crafting a solution.
What is Social Security?
Franklin Roosevelt created Social Security in 1935, providing retirement, disability, and survivor benefits for families of deceased workers. Social Security is largely a pay-as-you-go system, with today’s workers funding today’s beneficiaries.
Workers and employers each pay a 6.2 percent payroll tax for a combined 12.4 percent, up to an annual taxable wage ceiling, while self-employed workers, like many writers, pay both portions. Benefits depend largely on a worker’s earnings history and the age at which they claim them.
Full retirement age currently reaches 67 for people born in 1960 or later. Workers can claim reduced retirement benefits starting at 62, receiving an earlier payout but at a lower rate. Similarly, workers can delay benefits to age 70 to receive a higher rate.
Running Short
The main reason Social Security is running short is demographics. Americans are living longer than when the program was created. The Baby Boomer generation was large, and they are all moving into retirement age while birth rates have fallen.
The workforce isn’t growing fast enough to keep up with the number of people receiving Social Security benefits. So fewer workers are supporting more recipients. This is the reverse of how things worked a few decades ago; in 1960, roughly five covered workers supported every Social Security beneficiary.
Today the ratio is closer to three-to-one and projected to decline further. Meanwhile, beneficiaries can collect retirement benefits for years and years as they live longer—often into their eighties, nineties, and beyond.
When the Funds Run Out
Social Security won’t run out one day because workers still pay into the system.
The program would still continue receiving hundreds of billions of dollars annually.
The problem is that existing law generally limits benefits to available program resources, and if Congress does nothing, benefits would be reduced to match incoming revenues. Current projections suggest that incoming revenue would support only about 75 to 80 percent of scheduled benefits, meaning a retiree scheduled to receive $2,000 per month might receive closer to $1,500. Politically, this would be disastrous.
So the assumption is that Congress will eventually intervene. The question is how.
Limited Options
The simplest mathematical solution is to bring more money into the program, i.e., raise taxes.
One example is increasing the combined payroll tax rate above 12.4 percent.
Another option is to raise or eliminate the taxable wage cap. Some proposals also target higher earners. The advantage here is increasing revenues without reducing existing benefits.
The tradeoff is that workers and employers both pay higher taxes, which could affect labor costs and higher earners and, of course, have its own political ramifications.
Congress could also reduce expenditures to bring them closer to revenues.
This is the most politically dangerous option. Boomers, understandably, would not be happy if their benefits were cut. So the more likely option is to reduce future benefits, rather than cut current retirees’ benefits.
This could mean raising the full retirement age beyond 67 or changing the cost-of-living adjustment. This isn’t a great fix either, forcing people to work until they are almost 70, or reducing the benefits many of them have already spent their lives paying into.
Some combination solution is also likely—something that includes both revenue increases and benefit-side changes. Maybe accelerate payroll-tax increases while gradually raising the retirement age. It’s hard to say.
Because every method for fixing Social Security has significant political downsides, politicians are hesitant to get involved, though involvement is becoming increasingly necessary.
About the Author: Harrison Kass
Harrison Kass is a writer and attorney focused on national security, technology, and political culture. His work has appeared in Tablet, City Journal, The Hill, The Spectator, and The Cipher Brief. He holds a JD from the University of Oregon and a master’s in Global & Joint Program Studies from NYU. More at harrisonkass.com.
