Millions of Americans worry about Social Security – whether they will be able to receive the full retirement payments they were promised in the coming years. And many young people believe – incorrectly, in my opinion – that when they are ready to retire, Social Security will no longer be there for them.
The issue is considered so thorny in Washington that most politicians dance cautiously around it. The Social Security Trust Funds’ latest annual report, published in May, stated that unless action was taken, benefit cuts of about 20 percent would have to begin in 2033.
However, when we stop and really look at the problem, we discover that what’s needed to fix Social Security isn’t a big deal.
This is not a bold statement. It’s based on hard numbers calculated by Alicia Munnell, an economics professor at Boston College who is among the country’s leading experts on Social Security.
A 3.5 percentage point increase in the 12.4% Social Security payroll tax – half borne by employers and half by employees – is all that is needed to maintain the full flow of Social Security benefits across the country. 2030s and beyond, explained Professor Munnell in a telephone conversation.
She also emphasized that even if Congress did nothing to fix Social Security, you would still receive most of the benefits promised. This is because most of the money that funds Social Security checks comes from payroll taxes paid regularly by workers. Income from the system’s dwindling trust funds supplements it. Enough tax money will enter the system to pay for about 80 percent of benefits, even if the trust funds go to zero. But Professor Munnell doesn’t expect that to happen.
Why a solution is coming eventually
Benefits for people who are already retired – or about to be – are unlikely to be cut, because seniors vote in large numbers. Withdrawing the money they were promised would be political dynamite, as President Ronald Reagan discovered in the 1980s when his administration favored such a measure, only to quickly backtrack.
At some point, the political class will find a way to avoid this calamity. Millions of people already feel anguish and confusion about retirement. It would be much better for everyone if repair work happened sooner rather than later. Given deficiencies in the rest of the country’s pension system, preserving Social Security benefits — not reducing them — is critical to the well-being of current and future retirees, Professor Munnell said.
However, a Social Security tax increase will never be a popular measure. It’s not even being openly discussed by presidential candidates, although both the Biden and Trump campaigns say they are committed to keeping Social Security intact.
In an election year, candidates are not rushing to solve a problem that will not hurt people financially until the next decade and that will involve a tax increase, even a very small one.
“It’s going to be a difficult thing to do because you have to raise people’s taxes before they see anything concrete,” Professor Munnell said. “Taxes need to be raised so they can get what they already think they should get. And so I worry that, politically, in this country, we tend to go straight towards the abyss and only act after we have reached it. That’s what we did in 1983,” when Social Security last received a major overhaul.
Numbers, big and small
Professor Munnell, 81, has been doing serious research on Social Security since the 1960s. As assistant secretary of the Treasury for political affairs from 1993 to 1995, he officially dealt with Social Security. She has directed Boston College’s Center for Retirement Research since its founding 26 years ago, producing her own lucid annual reports on the state of the Social Security Trust Funds shortly after Social Security administrators issue theirs.
Although she is immersed in the complexities of Social Security, she takes a common-sense approach and provides easy-to-understand answers.
How big a problem is the Social Security funding gap? It may seem big or small depending on how you frame the numbers.
If you want to scare people, she said, point to the estimated total size of the difference between costs and revenues over the next 75 years: $22.6 billion. This is big!
But the US economy is huge and growing. As a fraction of the entire economy over the next 75 years, Social Security’s funding gap will be tiny: just 1.2% of gross domestic product.
The crucial factor to take into account is the payroll tax, as it provides the majority of Social Security funding. As a fraction of the total amount of money raised through the payroll tax, the funding gap is about 3.5 percent.
That’s why Professor Munnell recommends an additional 3.5 percentage points of payroll tax, which would be paid on top of the 6.2% that employers and employees are responsible for now. (Self-employed people pay the entire 12.4% tax themselves.)
Raise taxes by that amount without changing anything else, she said, and much of the problem will go away.
Roots of the problem
People of my generation, the baby boomers, are retiring en masse. At the same time, due to a long-term decline in the fertility rate, comparatively few people of working age pay taxes to keep the system fully funded. Immigration helped bolster the workforce, and much more immigration would solve the problem, but given American politics, it would be unwise to count on it.
These demographic issues were well understood in 1983, during the Reagan administration. It was then that a bipartisan commission led by Alan Greenspan, the future chairman of the Federal Reserve, presented the rudiments of a legislative package that put the system on a solid financial footing for some time.
Congress and the president finally agreed on some important changes. They included raising payroll taxes to the current rate, cutting benefits in subtle ways, and creating a surplus in trust funds, which have fluctuated in size since Social Security’s founding in 1935. The idea was that when the baby boom generation retired and more money flowed from Social Security than they received each year, trust funds would make up the difference.
In congressional testimony last year, Stephen C. Goss, chief actuary at the Social Security Administration, said that in 1983 officials expected trust funds to last until the mid-2050s. until then,” he said.
Instead, the day of reckoning will come about 20 years early.
Two things went wrong, Goss said. The first was the deep recession of 2007-2009, which destroyed long-term projections.
Second, and more important, is that income inequality in the United States has risen much faster than economists expected. Earnings for the richest 6% “have increased much faster than the overall average,” Goss said. In 1983, the Social Security payroll tax was imposed on 90 percent of the nation’s wage income. Now, with taxable wages capped at $168,600, only about 82.5 percent of the country’s wage income is taxed by Social Security, he said. The limit would have to be raised to more than $300,000 to return to the 90 percent coverage of the Reagan administration.
Raising the limit this way — taxing rich people more and everyone else less — would reduce the 3.5-point tax increase needed to fully fund Social Security to just 2.45 points, the Social Security system estimated.
Many options
Professor Munnell’s solution is simple and straightforward. It would add an automatic circuit breaker — which could temporarily freeze cost-of-living adjustments or adjust taxes or benefits — to prevent the system’s finances from getting out of whack again.
Your proposals make sense to me, even though I would take into account rising income inequality, raise the salary cap and reduce the overall wage tax increase. This is not a radical idea. It would be a return to the bipartisan spirit of Social Security reform endorsed by President Reagan, a famously conservative Republican, along with President Thomas P. (Tip) O’Neill Jr., the Massachusetts Democrat.
There are infinite ways to fix the system, and once a serious effort begins, many will be discussed.
However, cutting benefits should be scrapped, Professor Munnell said. Only about half of workers in the United States are covered by any retirement plan other than Social Security. Even for those covered by workplace retirement plans, the overall picture of retirement preparation is not good. The financial services industry is more than willing to step in with solutions, but always for a fee.
The reality is that for most people, Social Security is just as important now as it was 40 or 50 years ago.
The White House and Congress can wait until 2030, when benefit cuts will be imminent and general anxiety about reform will increase.
However, there is no doubt that millions of people would be better off if Social Security were fixed and benefits were guaranteed, and that has happened right now.