This week marks the 88th birthday of Social Security. Despite being America’s largest and arguably most important government program, Social Security’s actuaries (SSA) and the Congressional Budget Office (CBO) project that the program will run increasing deficits in each of the next 10 years and the program’s trust fund will fall from $2.8 trillion today to zero in either 2033, according to the CBO, or 2034, according to the SSA.
Absent congressional action, at that point every Social Security recipient would see their benefits cut immediately by about one-quarter, with further cuts in subsequent years. This change would be devastating for tens of millions of Americans and especially for the most economically vulnerable. For example, about 13 million of the 23 million elderly Americans in the bottom 40 percent of the income distribution draw more than 90 percent of their income from Social Security.
In contrast to other formidable challenges that our nation currently faces such as the Russia-Ukraine war, climate change, or the unpredictable trajectory of artificial intelligence, Social Security’s looming fiscal crisis has been well understood and expected for decades. It is primarily driven by a steadily declining ratio of workers to retirees resulting from lower fertility rates and rising life expectancies.
Unfortunately, most policymakers have shied away from even talking about this challenge, knowing that any solution would involve some combination of tax increases and benefit reductions. Two notable exceptions are Sens. Bill Cassidy (R-La.) and Angus King (I-Maine), who have tried during the past year to energize senators in both parties to join them in educating their constituents about Social Security’s looming fiscal crisis and crafting a reform package with an eye to equity and efficiency.
Fortunately, policymakers can look to the not-too-distant past for lessons about how optimally to address this shortfall. Forty years ago, Social Security was facing a similar funding challenge after several consecutive years of annual deficits and a trust fund that was approaching zero. A bipartisan commission headed by Alan Greenspan, who was chairman of the Council of Economic Advisers in the Ford administration, recommended changes to Social Security, which catalyzed an effort by Congress and President Reagan to make changes that put the program on a solid financial footing for decades.
The two key changes from the 1983 Social Security Amendments were an increase in the full retirement age (from 65 to 67) and an increase in Social Security’s payroll tax rate (from 10.6 percent to 12.4 percent). Benefits were unchanged for existing Social Security recipients and the full retirement age increase was phased in gradually so that workers aged 46 and up saw no change to scheduled benefits.
No significant changes have been made to Social Security in the 40 years since. The program now pays benefits to 1 in 5 Americans, with the average monthly benefit equal to $1,702 in June 2023. Social Security’s 67 million recipients are a diverse group that includes retired and disabled workers and their dependents along with widows, widowers and children of deceased workers.
Much has changed in America’s economic landscape since 1983. Income and wealth inequality have increased significantly. This development has stretched Social Security’s finances since the portion of workers’ earnings that is not subject to taxation (currently above $160,200) has increased by 70 percent. Additionally, life expectancy has increased by much more for high-income than low-income workers, so program benefits are becoming relatively more valuable for the affluent.
Next month I will be releasing a Social Security reform plan through the Aspen Economic Strategy Group that follows four principles.
First, current Social Security recipients or those likely to soon claim benefits would not experience any benefit changes, which they could not have planned for. Second, rather than uniform across-the-board changes (as in the 1983 amendments that applied equally to all), my reform plan targets the affluent for most tax and benefit changes. Third, the reductions in benefits are (as with the 1983 amendments) phased in gradually, giving workers sufficient time to prepare. And finally, the proposed changes are very simple and would put Social Security on a solid financial footing for many years to come.
An alternative to reform would be to continue ignoring this problem and hope that — when the trust fund hits zero — future policymakers will pass legislation that allows the U.S. Treasury to finance what would then be a nearly $400 billion annual Social Security deficit out of general revenues. This would be extremely unwise and short-sighted as it would inevitably crowd out spending on other important priorities such as national defense and investments in clean energy.
If you are optimistic about the ability of the U.S. Treasury to absorb this deficit, look no further than today’s federal deficit, which sits at an astonishingly high 6.4 percent of GDP per our calculations, despite an unemployment rate of 3.5 percent and economic growth that is the envy of the industrialized world. We put at risk the spectacular economic dynamism that we have enjoyed for decades if we do not enact smart policies soon.
Each day that policymakers wait will make Social Security’s eventual financing challenge more severe. Here’s hoping that policymakers will summon the courage to make the changes necessary to preserve Social Security for us, our children and their children. And I hope that all Americans will be able to proudly celebrate a 100th birthday party for a financially healthy Social Security program just 12 years from now.
Mark Duggan is the Trione Director of SIEPR (Stanford Institute for Economic Policy Research) and the Wayne and Jodi Cooperman Professor of Economics at Stanford University.