Social Security: Just Fix It Already

As economic inequality continues to grow, Social Security remains a vital source of retirement income for most older Americans. In fact, a large portion of older Americans, 40 percent by some estimates, receive retirement benefits from Social Security, but lack income from a pension, 401(k) or IRA in retirement. Why? A big part of the problem is that fewer employers offer pensions, and about half of the workforce still lacks access to a retirement plan at the job.

Given Social Security’s central role in the financial security of so many seniors, it’s not surprising that the 85-year-old program remains one of the nation’s most popular government programs. Recent polling finds strong bi-partisan support for protecting Social Security – 82 percent of Republicans say the program should remain a priority for the nation no matter the state of budget deficits, along with 81 percent of Democrats and 77 percent of Independents.

Yet again this year, despite the importance and popularity of Social Security, the Trustees report indicates that the program faces long-term financing shortfalls. Released a few weeks ago, the 2021 report indicates that the Social Security Old Age and Survivor’s Insurance (OASI) trust fund is expected to be exhausted by 2033, a year earlier than previous projections thanks to the pandemic.

It is unfortunate that we are in this situation because there are pragmatic solutions to shore up Social Security’s financing. It’s critically important to bolster a program that is the main source of income for millions of retirees and that keeps them out of poverty. What’s needed are long-overdue, serious policy discussions and action.

According to the Trustees report, “lawmakers have many policy options that would reduce or eliminate the long-term financing shortfalls in Social Security.” The report also notes that “lawmakers should address these financial challenges as soon as possible.” 

As soon as possible means now because the longer we wait, the more financial pain will be exacted on seniors and workers.

How did we get here and what is the path forward?    

The Social Security funding shortfall isn’t difficult to understand. The program faces increasing benefit expenses as Americans age, coupled with sharp declines in birth rates. This means that fewer workers are paying into the system. Less money is coming in and more is going out.  

According to the U.S. Census Bureau, the year 2030 will mark a demographic turning point for the nation as all Baby Boomers will be older than 65. One in every five Americans is projected to be at retirement age. Later that decade, by 2034, older adults will outnumber children for the first time in the U.S. history. Meanwhile, the number of births in the U.S. declined last year by four percent from 2019, double the average annual rate of decline of two percent since 2014, according to the CDC.

None of this is news to policymakers. For decades, Congress has heard warnings from trustees and experts about the demographics and financing issues. But there’s been a lack of will and consensus to take the steps need to bolster its financing.

And of course, coming to agreement is increasingly difficult in today’s hyper-charged, deeply divided political environment. Some see cutting benefits via raising the retirement age as the solution. Others support new revenue to maintain or even expand benefits. Interestingly, half of Americans support expanding Social Security, with 25 percent saying it should be expanded for all Americans and 25 percent saying it should be expanded except for wealthier households. Only two percent of Americans favor across the board benefit cuts, which is the threat posed if there’s inaction on Social Security. 

Putting the program on a sound financial footing and potentially expanding benefits will require a multi-pronged approach.

While there are many policy solution options, two approaches deserve particular consideration: addressing the “tax max” issue and increasing contributions.

Earnings subject to the Social Security payroll tax fall under an annual taxable maximum, also called the contribution and benefit base or the “tax max”. Since 1982, the tax max has been indexed to the average increase in wages. For about the past four decades, the percentage of workers with earnings above the tax max has remained stable at about six percent. However, the percentage of earnings subject to the tax max has declined from 90 percent in 1982 to 84 percent in 2017. This is because high-income earners have seen greater wage growth than the average earners.

One way to improve Social Security’s financing would be to raise or eliminate the tax max. This could be done in several ways. If the tax max was targeted to apply to 90 percent of earnings, as was the case in 1982, that change alone would eliminate somewhere between 20 and 30 percent of the funding shortfall, depending on how the increase is implemented. If the tax max was eliminated completely and the higher earnings now subject to the tax also were used for benefit calculations, that would eliminate more than half (55 percent) of the current funding shortfall. One variation on this proposal would eliminate the tax max but maintain the link between contributions and benefit while adjusting the benefit formula to limit the benefit increases for high earners. This proposal could eliminate two-thirds (66 percent) of the projected shortfall.

A second approach for shoring up Social Security’s financing would involve contribution increases from both workers and employers. Most Americans (60 percent) agree that it makes sense to increase the amount that workers and employers contribute to Social Security to ensure it will be around for future generations. 

The current contribution rates were set in 1984, and much has changed since then. Lifespans have increased. Data from the National Center for Health Statistics show that life expectancy increased by almost 10 years over about six decades – from 69.9 years to 78.9 years. As noted earlier, birth rates are dropping sharply. Economic inequality has worsened, which contributes to the rise in earnings above the tax max. And let’s not forget that the U.S. has endured multiple economic crises, which harm earnings and savings. So, it makes sense to revisit contribution rates nearly forty years later.

If we act soon, any adjustments to contribution rates could be phased in over time. And acting sooner rather than later means smaller contribution increases. 

For example, the Social Security Administration projects that increasing the payroll tax rate (currently 12.4 percent) to 15.8 percent in 2021 would eliminate 101 percent of the shortfall. Or, taking an incremental approach of increasing the current payroll tax rate by 0.1 percentage point each year from 2026 until the rate reaches 14.4 percent in 2045 would eliminate 46 percent of the shortfall.

Whatever the solution, policymakers must act now. If we get to 2033 without action, retirees across the board will see a 24 percent cut in their benefits. Retirees are depending on that income to pay their bills and likely have few alternative sources of income. It would be disastrous for many seniors and throw even more into poverty. 

There are precisely 4,105 until 2033. Let’s get to work.