Social Security, the intergenerational transfer of wealth that’s supposed to prevent poverty among the elderly, turns 81 this year. And it’s not in good shape. The culprit: demographic shifts.
For much of the last century, taxes were collected from the paychecks of workers and distributed to retirees, who had already given to the system while they were working. The problem is that the ratio of American workers to American retirees has been falling for decades, and since 2010 Social Security has been running on a deficit in the billions. For now, there’s enough in its reserves, from annual surpluses from 1984 to 2010, to cover the gap. But this won’t last forever. In its most recent report to Congress, the Social Security Board of Trustees projects that the program’s funds will be depleted by 2034, after which only 79 percent of what was promised to American retirees will be paid out.
Indeed, the “crisis” of Social Security isn’t that it’s going bankrupt or that there won’t be any benefits paid out after 2034. It’s that the system may not be able to pay all of what retirees put in and were promised—an issue that, according to many polls, is very important to many Americans both young and elderly. But the answer to that problem is something that economists, politicians, and policy makers have all disagreed on. So, what can be done about Social Security before 2034?
If Social Security needs more money, raise Social Security payroll taxes so that the program can keep paying out the promised benefits.
Is this a fair way to fix the system?
This is an effective, and pretty intuitive, option. Payroll taxes can be raised in order to cover Social Security costs. Currently, the tax rate is 6.2 percent for both employee and employer, totaling 12.4 percent. A Gallup poll found that half of Americans would be in favor of raising taxes in order to fund Social Security, if the alternative was reducing benefits. This is a consistently popular solution in various polls about how to fix Social Security, since research shows that gradually raising the payroll tax by just 2 percent would be enough for Social Security to be solvent for the next 75 years. The problem is that while payroll taxes would increase, there wouldn’t be an increase in benefits (as in everyone would just be getting the promised benefits, not more than that) as a result. Unsurprisingly, raising everyone’s taxes is not a popular idea among most politicians.
But raising the Social Security payroll tax isn’t the only way to raise the system’s revenues. The Social Security tax only applies to income earned below a certain threshold—this year, it’s $118,500. So it would fall to politicians to consider raising that cap, or eliminating it entirely.
If getting rid of the earnings cap would keep Social Security fully funded, politicians should just do that.
But will enough politicians get on board?
As wealthy Americans continue to get wealthier, a bigger share of their wages is escaping the Social Security tax. So, one proposed solution is to get rid of the cap and keep the 12.4 percent payroll tax rate, which would mean an estimated $100 billion more taxes a year for the wealthy, who currently pay a smaller proportion of their income into Social Security compared with poorer families. Simply put, this would close the current funding gap.
There are, of course, critics against raising the cap, because having a higher cap (or getting rid of it) means that the top earners in the country will pay more into Social Security. Conservatives opposed to raising taxes hold the same argument for Social Security taxes, namely that eliminating the cap would hurt GDP and economic growth generally and that wealthy Americans are already paying more income taxes. Others argue that this means in the future when those high earners retire, simply getting rid of the cap wouldn’t completely solve the problem.
Let’s change the Social Security benefits formula to reduce the size of payouts. Or raise the retirement age. Or change the cost-of-living adjustment.
These options are technically possible, but would Americans accept any of them?
Cutting benefits by 17 percent would solve the problem for the next 75 years, but it would short-change current retirees who are counting on what they were promised. Not to mention, they’d be getting less than they put in. If nothing is done, Social Security can still pay out 79 percent of the promised benefits. Reducing benefits is one of the most unpopular options, partly because it has a greater impact for low- and middle-income families, who, unlike wealthy families, may not have as much in the way of retirement savings. Moreover, a reduction in benefits would likely reduce public support for Social Security because it would probably lead people to question the fairness of the program.
Some politicians have been calling for the retirement age—the cutoff for when Americans can start collecting Social Security benefits—to be raised to 68. Currently, the retirement age is 66 for those born before 1960 and 67 for those born that year or after. Because Americans can secure larger monthly Social Security payouts the longer they wait to start taking them, raising the retirement age would mean that future retirees would be getting smaller monthly payouts than anyone who retires at the same age today. Raising the retirement age, then, would be a way to reduce benefits, and would mean that retirees get possibly significantly smaller payouts.
The problem with this approach—aside from giving people less than they’d hoped for—is that it would improve the system’s solvency, but not by enough to completely solve the problem.
Another way to reduce benefits would be to lower the cost-of-living adjustment (COLA), an additional amount of money tacked onto monthly payments according to how expensive it is to buy basic goods that year. Currently, the COLA is based on the consumer price index. But many experts disagree about whether the consumer price index is a good measure of inflation. Another issue with lowering COLA is that the reductions accumulate over time, so the oldest Americans would see the largest reductions. And it’s expected that poverty rates would increase from reducing COLA, because a decrease in benefits, on the margin, is more likely to affect poorer Americans than wealthier ones. One middle of the road option is using what’s called chained-CPI (a version of the consumer price index that takes into account substitutes, and thus rises slower) but neither would do all that much to improve solvency.
Maybe not everyone needs social security equally. We should conduct means-testing and eliminate Social Security benefits for people who already have enough saved up for retirement.
Would means-testing be fair?
This is how Medicaid works: All Americans pay in, but those found to have enough means, and thus don’t require government assistance, don’t qualify for the program. But, of course, there are a couple arguments against doing the same thing for Social Security. First, it seems unfair. Second, there’s a possibility that it might not even save that much money since so few people are in a good financial position going into retirement.
Yet again, things are more complicated than they’d seem.
No solution seems fair to everyone, so maybe Social Security should just borrow money from somewhere else so it can pay out all of its promised benefits.
Does this defeat the mission of Social Security?
That’s the heart of the problem with Social Security solvency: No solution seems quite fair enough. And borrowing money or getting an injection of cash from the government budget violates Social Security’s main premise, which is that it’s designed to be a wholly self-financed system.
Similar to this idea is that Social Security could find a new revenue stream to generate more income to cover payments. Currently, by law, Social Security trust funds are invested in safe, low-return, federal-government securities. So, theoretically, the funds could be invested in other ways—like being put toward stocks—to generate more revenue. But this is considered an extreme option because private securities can be risky, and would probably create headaches down the line.
The good thing about solving Social Security is that there really are only two basic answers: increase revenue or reduce benefits.
The question is: How should the U.S. do it in a way that not only feels fair, but is also politically viable and can feasibly make it through Congress?
In the end, the biggest question might be whether anyone is willing to do anything about it until 2034. After all, the 1983 funding rules came just months before expected insolvency and required bipartisan compromise.
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