Six (Painful) Ways to Save Social Security
With the Social Security Trust Fund projected to run out of money in 2034, and demographic shifts underway, pressure is slowly growing to find some way to keep the popular program solvent for years to come. In a new brief out today from the American Institute for Economic Research, the authors highlight the six options policymakers have for doing that.
The authors of the brief, Polina Vlasenko and Luke Delorme, note that the longer lawmakers wait, the more painful these choices become, especially as the beneficiary population grows faster than the worker base. The solution, they said, is likely to come from some combination of these strategies that ease the effects on any one group.
These strategies include two possible ways to raise revenue:
- Increase the payroll tax rate. Increasing the tax by 2.7 percent now would cover the entire shortfall over the next 75 years, the authors report. This tax has gradually been raised since the Social Security system began collecting taxes in 1937.
- Raise the cap. Currently, only $118,500 of an individual’s annual wages is subject to Social Security taxes. The authors say raising that cap would affect only higher-income workers, but might encourage a movement towards non-wage compensation to get around the cap.
And they include four possible ways to cut benefits:
- Make an across-the-board cut. Social Security could be saved for 75 years if a 16.4 percent cut on current and future beneficiaries is made now, or a 19.6 percent cut if applied only to those who retire in 2016 and later.
- Raise the retirement age. It has already been raised from 65 to 66, and a further increase to 67 is on the way as life expectancies increase. Gradually increasing the age from 67 in 2023 to 70 in 2069 would fill about 26 percent of the 75-year funding gap.
- Change the way benefits are indexed. Using the chained CPI, rather than the CPI-W, would reflect slower cost of living increases, reducing annual adjustments. This could close about 10 percent of the gap.
- Use benefits means testing. A version of this already exists, as Social Security benefits began being taxed in 1983. Expanding means testing can improve Social Security’s finances but might erode support for it, if it is no longer seen as a program where everyone participates.
“Reforming Social Security is a complex and often emotional topic. Any reform will adversely affect some groups while helping others. Nevertheless, some reform is needed in the next few years or Social Security will start imposing a significant burden on the federal budget,” Vlasenko and Delorme write. “Every option for reform has opposition, but it still should be possible to create a package of reforms that would fix the finances of Social Security.”
The entire brief is on our Web site, available to read free of charge.
