Those paying close attention to Social Security will recall the latest trustees’ report detailing how the Social Security trust fund could run short of money as early as 2034 unless Congress acts to shore up the system’s finances. The report also noted that “lawmakers have many options for changes that would reduce or eliminate the long-term financing shortfalls.”
A few years ago I wrote that it’s unfortunate that we are still in this situation because there indeed are pragmatic solutions to shore up Social Security’s financing. The clock is ticking louder, but realistic solutions remain. What has been lacking is the political courage to act on a difficult issue.
First, Some Context
The hard reality is that it will cost more, as a share of pay, in the future to achieve the same standard of living in retirement that retirees enjoy today. Longer lives for many Americans, coupled with higher health costs and an aging workforce, means that the same retirement outcomes will require more resources to be put aside while working. This is why people who work on retirement issues have long been concerned about strengthening Social Security as well as workplace retirement programs.
Because the Social Security program has been projecting future deficits for many years, it is easy to grow pessimistic and believe that solutions are hard to find. However, it is also important to step back and understand that these projections have been pretty consistent over time, and the real reason we keep hearing the same warnings is that no major corrective actions have been taken.
The rates used to fund Social Security benefits haven’t changed often, even though it may seem that way. In fact, I was probably asking my parents for an Atari the last time Congress acted to change the rates in a law passed in 1983. That effort has kept costs stable (as a percent of payroll) for 40 years and is likely to be sufficient for another 10. But, for a number of reasons, it is not sufficient to support current levels of benefits forever.
The trustees’ report keeps warning about the shortfall because they’ve known about it for a long time, but it is lack of action that keeps the issue in the headlines.
The rate setting process used in 1983 was based on economic and demographic projections. In hindsight, any fair-minded person would concede that it was done well. There are not many areas where we are still dependent upon financial projections that were developed so long ago, given the number of unanticipated developments since then.
Kudos to Social Security’s actuarial team from the early 1980s for developing projections that will end up working for fifty years. Now, though, it is time to heed what their actuaries are saying today.
Would Congress Really Allow Massive Cuts to Go into Effect?
It is often said that, if no corrective action is taken to fund Social Security, then benefit cuts of 20-25 percent will go into effect. There is good reason to doubt this assumption.
First, to say that this would be disruptive to retirees, a growing share of the population, is a massive understatement. Second, this is a group that policymakers frequently target to help, not harm, given the political incentives that exist.
For instance, George W. Bush, facing a challenging reelection in 2004 (and what presidential race is not challenging these days?), fought to add prescription drug coverage for seniors under Medicare. Many who were opposed to the bill did so because they wanted it to be more comprehensive, not less.
Eventually, policymakers will take action on Social Security’s finances. It’s just politically untenable to cut Social Security benefits because the program increasingly serves as a financial lifeline for millions of older Americans, and it’s one of the programs that enjoys broad bipartisan support. But the longer Congress waits, the more expensive the eventual fix will be.
If lawmakers wait until the last minute, there is a strong likelihood they will have to tap other federal resources, such as general fund revenues, to maintain current benefit levels and avoid the political backlash from benefit cuts. This use of general fund revenues is a line that is rarely crossed. And, perhaps, never quite so directly as in this potential scenario.
Given that income taxes and other sources of federal revenues are generally more progressive than the payroll taxes that support Social Security, there are implications for who pays for these benefits. While that may all sound a bit wonky, the short story is that those with higher incomes would find themselves paying a larger share of the cost of Social Security without receiving larger benefits. This could affect political support for the program, which has always maintained a connection between payroll taxes paid and benefits received, even with a progressive benefit structure.
As with every other form of retirement savings, time is on the side of those who save early, and this is just as true for Congress and Social Security as it is for an office worker putting savings into her 401(k). The options for strengthening Social Security’s finances only become more expensive the closer we get to the date of the trust fund’s exhaustion, and potentially making up the shortfall with general fund revenues would be one of the most expensive options of all. Congress could demonstrate a real commitment not just to the growing senior population, but to fiscal responsibility by acting soon to shore up Social Security’s financing.
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