With the debt-ceiling issue confronting the U.S. Congress this month, it may be particularly appropriate to review the current condition of Social Security, one of the fiscal challenges facing the country. It’s been over thirty years since the last legislation to repair the Social Security system was enacted. Back in 1981, with actuarial projections indicating that Social Security would go broke in as few as two years, President Reagan appointed a commission directed by Alan Greenspan to recommend solutions. The resulting changes included raising the payroll tax, phasing in a later retirement age, and making some adjustments to the benefit formulas. One result of these modifications was that for over two decades, Social Security was collecting more in taxes than it paid out in benefits, with the surpluses deposited in the Social Security Trust Fund. At the time it was believed that when baby boomers first hit retirement in 2010, this Trust Fund buildup would be sufficient to maintain the system indefinitely without significant adjustments. However, by the late 1980s it became apparent that while the modifications did buy the system decades of solvency, Social Security would need further adjustments in the 21st century. By 2010, the Trust Fund started declining as annual payroll tax revenues fell below the annual benefits paid out.
In a recently released annual report, the Social Security Board of Trustees stated that by 2034 the Trust Fund will be exhausted, and without adjustments only 77% of the promised benefits could be paid. This fiscal challenge is driven by the underlying demographics: In the 1950s, there were almost nine workers paying into Social Security for each beneficiary; today, that number is less than three workers for each beneficiary, and by 2034 this ratio will decline to about two to one. However, the fiscal challenge seems to be essentially a one-time problem, because the gap between the tax receipts and the benefits paid won’t change much after 2035, when the demographic shift of the retiring baby boomers should end. If we can enact reforms that increase tax receipts and/or reduce benefits, then it should be possible to bring Social Security into balance for the rest of the 21st century. There are many feasible reforms, but here are just a few:
•Increase the retirement age to 70 by 2034 (estimated to eliminate 40% of the actuarial imbalance).
•Raise the combined payroll tax by 0.1% each year from 12.4% in 2022 to 14.4% in 2041 (55% of imbalance).
•Increase the income subject to the payroll tax from its current $127,200 to $320,000 over a 10-year period (40% of imbalance).
While there are many other suggested reforms, compared with the rising Medicare/Medicaid imbalance, the Social Security gap is a relatively easy problem. However, regardless of the reforms adopted before 2034, one clear message for citizens is to save and invest sufficiently to cover the inevitable benefit reductions or tax increases.