(President Bush looking at Social Security Trust Fund Bonds stored at Bureau of the Fiscal Service in Parkersburg, WV – 2005)
Source: Social Security Administration
For those of us who work on Social Security policy, the week when the annual Social Security Trustees Report is released is our busiest time of year. On cue, the Social Security Actuary goes on a road show with results from the new report, while groups on the left, right, and center of the policy world trot out their policy wizards to dissect the results. Since Congress has not materially adjusted Social Security in over 30 years (other than for giving extra unearned benefits to high-paid government workers last year), even as the date of Trust Funds exhaustion comes ever closer, the message from these experts is generally full of doom and gloom. This year was no exception.
According to the Trustees Report, the Trust Fund will now go insolvent in the fall of 2032, instead of the 2033 date in last year’s report. Once the Fund goes to a zero balance sometime between October and December of 2032, the Social Security Administration will be required to only pay out checks based on revenues coming in (pay-go). The Trustees estimate that this would mean that the size of the checks going out to every Social Security beneficiary would drop by 22%, with the average beneficiary getting around $440 cut from their monthly benefit, regardless of the assets or the needs of the seniors who depend on those checks every month.
As bad as that sounds, that’s just the easy stuff. Due in part to lower fertility rate assumptions, and in part to bipartisan congressional meddling, the long-term Social Security projections are much worse than last year. Since the dollar numbers that the Trustees talk about when discussing long term finances are so big, policymakers discuss long term shortfalls in terms of a percentage of the total payroll of all Americans. Last year, the shortfall was 3.82% of payroll. This year, this jumped way up, to 4.42%. In current dollars, that means the 75-year Social Security shortfall estimate went up by over $5 trillion in just one year. According to estimates by the Committee for a Responsible Federal Budget (CRFB), Social Security faces a deficit of $3.8 trillion over the 10-year budget window, and $31 trillion over the next 75 years.
So, what can be done to fix this? In the long run, we can encourage more Americans to have kids, but that discussion is outside the scope of this blog post. In the short run, we can encourage Congress to stop making things worse for the Trust Fund. For example, when the “No Tax on Social Security” provision from the Working Families Tax Cuts approaches expiration in 2028, Congress should not simply extend it and ask taxpayers or Social Security beneficiaries to foot the entire bill. Taxes paid on Social Security benefits get sent back to the Trust Fund, so cutting taxes on this worthy group hurts Social Security’s future solvency.
We can also encourage Congress to start having real discussions on how to fix the program. Policymakers on all sides know the “levers” that can be used to fix Social Security—policy fixes in this space are not particularly complicated. However, one-sided legislative proposals to fix Social Security have no chance of ever becoming law, particularly because Social Security is legislatively excluded from the reconciliation process. That means a fix to this program will need votes from 60 senators. This reality does not stop some members of Congress from proposing unrealistic legislation. Progressives propose legislation that greatly increases benefits for most Americans. Conservatives have generally proposed fixes that are focused more on the spending side, including this thoughtful proposal by former Congressman Sam Johnson in 2016, but some provisions—like broad increases in the retirement age—are not easy to sell to voters.
While there are several proposals out there to create commissions or other processes to fix Social Security, the only real bipartisan proposal to fix the program in recent years was authored by Senator Bill Cassidy (R-LA), along with Senators Tim Kaine (D-VA), Angus King (I-ME), and a broad bipartisan group of other senators. Their proposal would cover the shortfall by roughly splitting the difference with an innovative set of traditional proposals seen in previous solvency efforts and what Senator Cassidy dubbed “The Big Idea.” This “Idea” centered on borrowing $1.5 trillion in U.S. Treasuries and investing this in private markets, using the upside to cover the shortfall in the long run. While policy experts on both the left and right have justifiably panned this borrowing proposal, these senators deserve credit for designing a “real world” proposal that could fix Social Security without greatly increasing taxes or deeply cutting benefits.
Each year that Congress delays fixing the program costs taxpayers more in the long run. The fact that the Trust Fund itself is effectively just an accounting mechanism that has subsidized government spending means that its impending depletion will place more stress on the overall federal budget, increasing the possibility that a fiscal shock may occur where bondholders may become less willing to finance our massive federal debt. Fixing the program soon may increase trust among those who finance our debt, possibly lowering long term interest rates and helping to grow our economy.
If the worst outcome happens, and Congress does nothing to fix Social Security before the Trust Fund goes to zero, sometime in October or November of 2032, Social Security will be forced to cut checks by an average of 22%. But the Social Security Administration is not required to cut benefits by the same percentage to everyone. Some researchers have proposed a creative way to adjust benefits in a progressive manner by capping benefits at a certain level to protect those vulnerable Americans who cannot afford reduced benefits.
Over the next few months, we will describe various aspects of the Social Security policy challenge, including pointing out promising policy proposals from researchers from across the ideological spectrum. We are hopeful that Congress will decide to take action to fix the program soon. However, we will also continue to note our concern about any proposal that rests on broad-based and anti-growth tax increases, like increasing payroll taxes or the Social Security “tax max.” There is no need to hurt taxpayers, and the broader economy, while trying to fix Social Security.