Everybody Wants to Save Social Security

Will Republicans Be Willing to Pay for it?

President Biden says Social Security cuts are off the table and Republican leaders, running for cover, agree.

What few elected officials, and no Republicans, talk about is, protecting the program will require serious tax hikes. That has to happen; Social Security is a vital program.

The depression-era entitlement is a life-raft for sixteen million seniors who would otherwise be in poverty and the primary source of security to tens of millions more. But preserving benefits at legislated levels—or anything close—is going to cost. There is no use pretending otherwise.

The Social Security Trust Fund[1] is all but broke. A decade from now—an eyeblink in demographic time—the trust fund will be depleted.

By 2034, according to the Congressional Budget Office, Social Security will be able to pay only 77% of scheduled benefits. If Congress does nothing, benefits will then go down by 23%, and eventually by 35%.

Recent political trash talking implies that nothing’s going to change. But benefit cuts or higher taxes or some combination of the two are unavoidable. Doing nothing isn’t “protecting seniors”—it’s passing the buck for just a few years until someone else is in office.

Republicans have not really disguised their eagerness to cut benefits, although they won’t say it out loud. However, President Biden didn’t help when he rejected a Republican call for a bipartisan commission to craft a fix. With the GOP playing footsie with the debt ceiling, the White House, in a similarly pugilistic spirit, dismissed a proposed Social Security and Medicare commission as a “death panel.”

An Alan Greenspan-led commission put a reasonable band-aid on Social Security in 1983. Admittedly, its problems then were far less serious.

Since then, the demographic fuse has continued to burn. Life expectancies are up, birth rates down. In 1950, 16 workers were contributing to the system for every beneficiary. Today, including people on disability, the ratio is 2.8 workers for each beneficiary.

For benefits to remain reasonably stable, taxes will have to go up. That’s logical: as a society ages, more of its resources should go to the elderly. (Sorry, millennials.) But restraints on the rate at which benefits increase, particularly at higher incomes, must be considered, too.

Social Security’s financial problems can be described in two ways. The program functions as a massive transfer system, collecting taxes and dispersing benefits. When revenue is more than outgo, the surplus is credited to a trust fund. When the system is in deficit, the trust fund is debited.

By law, if the trust fund is exhausted, the system cannot spend more than it takes in. That’s the reason for the urgency. This year, the trust fund balance will drop by $53 billion. Next year, $89 billion, and so on until it is exhausted in 2033.

The trust fund balance is an accounting snapshot. It says nothing about Congress’s ability to raise, or borrow, cash. So Congress could, if it chose, change the law and borrow to pay the missing 23%.

But the looming accounting shortfall is meaningful in the context of the program’s purpose and design. The New Deal intended Social Security to be a worker-financed insurance pool. Each generation of retirees would be supported by younger workers. In the late 1930s, a 2% payroll tax was sufficient. Now, the tax is 12.4% (half of it levied on workers, half on employers).

If Congress were to amend the law and pay benefits irrespective of the trust fund balance, Social Security would become a different sort of animal—a line-item budget expense. It would be welfare spending.

The other way of assessing Social Security is on a cash basis. The CBO projects that the program will spend $1.336 trillion, equivalent to 5.1% of the U.S. economy’s total output, in 2023. In ten years, as more boomers retire, spending will rise by three-quarters, to 6% of economic output.

In cash terms, the program is a serious strain on the budget. According to the CBO’s latest projection, the annual federal deficit is going to double over the next ten years, to $2.7 trillion, and Social Security is the biggest single reason.

You can think of the looming trust fund deficit as a signal that, in cash terms, Social Security is squeezing the Treasury. Our recent experience with inflation provides a good answer to why running the program on unlimited borrowings is not a good idea.

Keeping the trust fund solvent will put a brake on the cash drain. But every year Congress waits, the problem becomes worse. 

Mathematically, you could close the trust fund gap by raising the payroll tax to a whopping 17%. That would make the plan solvent for 75 years, which is considered actuarial balance. Congress could also balance it by slashing benefits 26 percent. Both of these are political non-starters, but they suggest the magnitude of the problem.

What seems more likely is that the program will become more progressive—higher taxes on high-earners, and maybe slightly higher for everyone. And trims to benefit growth, also progressively.

Biden has suggested, without offering details, that income above $400,000 be made subject to the payroll tax. (At present, payroll taxes are levied only on the first $160,000, a figure that rises with average wages.) But that would close less than half of the solvency gap. Bernie Sanders has proposed a more draconian fix, extending the tax to all income above $250,000—and not correspondingly increasing benefits. (He also wants to raise taxes on business and investment income.)

That would be a big design change. Although Social Security’s benefit formula includes a subsidy (people at the bottom receive more in benefits, in proportion to what they contribute), everyone gets something. Under the Sanders plan, high earners would simply be making an incremental contribution with no corresponding increase in benefits. It would be less like the “promise” Biden calls it, a mutual exchange between citizens and government, and more like a welfare program.

Another possibility, more likely in my view, is to tweak the subsidy to make it more progressive. High earners would still get some incremental benefit for each dollar they were taxed—but less of a benefit than now.

The math works better if you clobber the rich with higher taxes. But the principle of collective security—presumably one reason for the program’s enduring popularity—is better preserved if the economic pain is, to some degree, shared.

There are other ways to generate savings. Many economists think the cost-of-living formula overstates inflation. Using a different formula, benefits would still rise with the cost of living, but not as sharply. (Benefits this year rose 8.7%.)

These tweaks will require hard negotiations. A closed-door commission is the best forum to hammer them out. Once the debt ceiling is raised, Biden should go for it.

The most attractive ideas involve changing the demographic balance by attracting more workers. One way of doing that is to change the benefit formula, so that total benefits rise more quickly as people work longer. In other words, make Social Security more like traditional pensions, which are designed to be retention tools.

Another way is to raise the retirement age from 67. A one-year change would close 13% of the actuarial gap. That would penalize lower-income workers, who on average don’t live as long. But the change could be offset with a subsidy at lower incomes.

Finally, the U.S. should admit more immigrants. Immigrants are younger and are more likely to work than native-born Americans. And in case you haven’t noticed, America has a worker shortage. So immigration is a win-win.

If there is one subject Congress wants to avoid as much as Social Security, it's immigration. But Congress will have to talk about these subjects. The sooner the better.

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[1] There are actually two Social Security trust funds, Old-Age and Survivors Insurance (OASI), and Disability Insurance (DI) Trust Funds. The exhaustion refers to the retirement (OASI) fund.