As economic inequality continues to grow, Social Security remains a vital source of retirement income for most older Americans. In fact, a large proportion of older Americans, 40 percent by some estimates, receive Social Security retirement benefits but have no income from a pension, 401(k) or IRA upon retirement. Why? A big part of the problem is that fewer employers are offering pensions and about half of the workforce still doesn’t have access to a retirement plan at work.
Given the central role of Social Security in the financial security of so many seniors, it’s not surprising that the 85-year program remains one of the most popular government programs in the country. Recent polls show strong bipartisan support for Social Security protection — 82 percent of Republicans say the program should remain a priority for the nation regardless of the state of budget deficits, along with 81 percent of Democrats and 77 percent of the Independents.
Also this year, despite the importance and popularity of Social Security, the Trustees’ report indicates that the program faces long-term funding shortfalls. The 2021 report, released a few weeks ago, indicates that the Social Security Trust Fund for Old Age and Survival Insurance (OASI) is expected to be exhausted by 2033, a year ahead of previous projections thanks to the pandemic.
It is unfortunate that we are in this situation, because there are pragmatic solutions to support social security financing. It is critical to support a program that is the primary source of income for millions of retirees and keeps them out of poverty. What is needed is long-awaited, serious policy discussions and action.
According to the Trustees’ report, “lawmakers have many policy options that would reduce or eliminate long-term funding gaps in Social Security.” The report also notes that “legislators need to address these financial challenges as quickly as possible.”
As soon as possible means now, because the longer we wait, the more financial pain seniors and employees will be claiming.
How did we get here and what is the way forward?
The Social Security funding gap is not difficult to understand. The program faces rising benefits as Americans age, coupled with sharp declines in the birth rate. This means that fewer employees pay into the system. Less money coming in and more going out.
According to the US Census Bureau, the year 2030 will be a demographic turning point for the nation as all baby boomers will be over age 65. One in five Americans is expected to be of retirement age. Later that decade, by 2034, there will be more older adults than children for the first time in US history. Meanwhile, the U.S. birth rate fell four percent from 2019 last year, double the average annual drop rate of two percent since 2014, according to the CDC.
None of this is news to policymakers. For decades, Congress has heard warnings from administrators and experts about demographic and funding issues. But there was a lack of will and consensus to take the steps needed to bolster funding.
And, of course, it is becoming increasingly difficult to come to an agreement in today’s hyper-charged, deeply divided political environment. Some see lowering benefits through raising the retirement age as the solution. Others support new revenue to maintain or even expand benefits. Interestingly, half of Americans are in favor of expanding Social Security, with 25 percent saying it should be expanded for all Americans and 25 percent saying it should be expanded except for wealthier households. Only two percent of Americans support general cuts in benefits, which is the threat if Social Security is left unchecked.
Getting the program on a sound financial footing and potentially expanding its benefits requires a multifaceted approach.
While there are many options for policy solutions, two approaches deserve particular attention: tackling the “tax ceiling” problem and increasing contributions.
Income that is subject to the SZW is subject to an annual taxable maximum, also known as the premium and benefit base or the “fiscal maximum”. Since 1982, the tax max has been indexed to the average wage increase. Over the past four decades or so, the percentage of workers with an income above the tax ceiling has remained stable at about six percent. However, the percentage of earnings subject to the tax cap has fallen from 90 percent in 1982 to 84 percent in 2017. This is because high-income earners have seen greater wage growth than average earners.
One way to improve Social Security financing would be to increase or abolish the tax limit. This can be done in various ways. If the tax cap were applied to 90 percent of revenues, as was the case in 1982, that change alone would eliminate between 20 and 30 percent of the budget deficit, depending on how the increase is implemented. If the tax max were to be completely abolished and the higher income that is now subject to the tax is also used for the calculation of the distribution, this would eliminate more than half (55 percent) of the current funding shortfall. A variation on this proposal would abolish the tax cap, but maintain the link between contributions and benefits, while adjusting the benefit formula to limit benefit increases for high earners. This proposal could eliminate two-thirds (66 percent) of the projected deficit.
A second approach to support Social Security financing would be contribution increases from both employees and employers. Most Americans (60 percent) agree that it makes sense to increase the amount employees and employers contribute to Social Security to ensure it is there for future generations.
The current premiums were established in 1984 and a lot has changed since then. The lifespan has increased. Data from the National Center for Health Statistics shows that life expectancy has increased by nearly 10 years in about six decades – from 69.9 years to 78.9 years. As noted earlier, birth rates are falling sharply. Economic inequality has worsened, contributing to the rise in income above the tax cap. And let’s not forget that the US has endured multiple economic crises, hurting revenues and savings. It is therefore logical to look again at the premium percentages almost forty years later.
If we act quickly, any adjustments to premium rates can be implemented over time. And trading sooner rather than later means a smaller premium increase.
For example, the RSZ predicts that an increase in the payroll tax rate (currently 12.4 percent) to 15.8 percent in 2021 would eliminate 101 percent of the deficit. Or a step-by-step approach of raising the current payroll tax rate by 0.1 percentage points per year from 2026 until the rate reaches 14.4 percent in 2045 would eliminate 46 percent of the deficit.
Whatever the solution, policymakers must act now. If we reach 2033 without action, retirees will see a 24 percent cut in their benefits across the board. Retirees depend on that income to pay their bills and are likely to have few alternative sources of income. It would be disastrous for many seniors and plunge into poverty even more.
There are exactly 4,105 days to 2033. Let’s get to work.