According to the latest estimates from the Social Security Trustees' report, the trust fund that holds Social Security's reserves is expected to be completely depleted by 2034 unless something is done to close the expected funding gap.
You can read a thorough discussion of why Social Security is projected to run out of money here. In a nutshell, the U.S. population is aging fast, and there aren't going to be enough people paying into the system to cover the benefits that will be flowing out. As a result, Social Security will have no choice but to dip into its reserves to make its promised benefit payments.
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According to the nonpartisan Congressional Budget Office (CBO), the amount of tax revenue flowing into Social Security in 2017 will be equivalent to 4.5% of GDP, while outflows will equal 5%, a small deficit. That relatively small deficit is expected to be compensated for by the investment earnings on the trust fund's assets.
However, the difference between the incoming and outgoing revenue is expected to get much larger in the future. Here's what the CBO expects to happen over the next 30 years.
|
Year |
SS Tax Revenue (% of GDP) |
SS Outflows (% of GDP) |
Deficit |
|---|---|---|---|
|
2017 |
4.5% |
5% |
(0.5%) |
|
2027 |
4.4% |
5.9% |
(1.5%) |
|
2037 |
4.4% |
6.3% |
(1.9%) |
|
2047 |
4.4% |
6% |
(1.6%) |
Data source: Congressional Budget Office.
Between 2027 and 2082, the overall funding deficit is projected to fluctuate between 1.5% and 1.9% of GDP. It's fair to say that for long-term viability, we need to make changes that narrow this gap by about 1.7% of GDP on an ongoing basis.
In addition, the CBO evaluated 36 potential changes to Social Security and what their effects on the funding gap would be. All of these changes fell within five specific categories:
- Increase revenue to Social Security
- Change the benefit calculation formula
- Increase the full retirement age
- Change the way cost-of-living adjustments (COLAs) are calculated
- Adjust benefits for specific groups of people, such as wealthy retirees
None of the proposed changes is enough to bridge a gap equal to 1.7% of GDP all by itself -- not even close. However, through combinations of changes, it is certainly possible to return Social Security to long-term financial solvency. Here are three of many possible combinations that would completely solve Social Security's funding problems for the long run.
1. Increase tax revenue
A survey by the National Academy of Social Insurance found that the majority of Americans on both sides of the political spectrum are opposed to cutting Social Security but are OK with tax increases to bring the program to solvency.
One possible combination of changes would include increasing the payroll tax by 2% over a 10-year period, which would increase revenue by 0.6% of GDP, and eliminating Social Security taxable maximum wages without increasing benefits, which would increase revenue by 1.1% of GDP. This combination would result in a 1.7% boost in Social Security's tax revenue over the long term, without any other changes.
2. Reduce benefits
While unpopular among the American people, Social Security cuts are another potential change. With a Republican president and Congress, it's certainly possible.
Here's a combination of various cuts to Social Security that would add up to 1.7% of GDP in increased tax revenue:
- Use 40 years of earnings history instead of 35 when calculating the primary insurance amount (0.2% of GDP)
- Add an additional bend point to the three we have now (90%, 32%, and 15%) and reduce benefit thresholds (0.6% of GDP)
- Raise the full retirement age to 70 (0.5% of GDP)
- Change the COLA index to the slower-growing chained CPI-U (0.2% of GDP)
- Index benefits to changes in longevity (0.2% of GDP)
3. A little bit of both
As you can see, fixing Social Security without raising taxes would require a lot of cuts. A more likely scenario would be a compromise, consisting of some tax increases and some cuts. Here's an example of what this could look like:
- Increase the payroll tax by 2% over a 10-year period (0.6% of GDP)
- Eliminate the Social Security taxable maximum, but increase benefits for high earners (0.7% of GDP)
- Raise the full retirement age to 68 (0.2% of GDP)
- Lower COLAs for retirees with high primary insurance amounts (0.2% of GDP)
- Use 40 years instead of 35 to calculate primary insurance amounts (0.2% of GDP)
To be clear, these are three of many potential combinations that could potentially fix Social Security, and none of these has been specifically proposed yet. The point is that although Social Security isn't exactly on the most stable financial footing, the problem is a fixable one, and there are several ways it could be done.
