More than 66 million Americans received Social Security benefits in January, and many of them depend on that income to make ends meet. But experts believe the program is facing a funding deficit of $20.4 trillion between 2022 and 2096, from pressures created by the aging population and historically low birth rates. Put simply, the number of workers paying taxes into the Social Security program is shrinking in relation to the number of beneficiaries, and that problem is chewing away at the trust fund.
Last year, the trust fund balance dropped $22 billion to $2.8 trillion, as cash inflows from payroll taxes and interest failed to offset cash outflows. In the absence of change, Social Security will continue to run a deficit each year through 2035, at which point the Board of Trustees believes the trust fund balance will reach zero. If that happens, interest income will disappear, and revenue from payroll taxes would cover just 80% of scheduled benefits in 2035, declining to 74% by 2096.
Here are two ways lawmakers could keep the trust fund solvent. Unfortunately, neither solution will keep everyone happy.
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Increase the Social Security payroll tax rate
In broad strokes, there are two ways to eliminate the $20.4 trillion deficit: Increase revenue or reduce spending. One way to increase revenue would be to raise the Social Security payroll tax rate. Under current law, employees contribute 6.2% of their wages, and their employers match that sum for a total of 12.4%. But bumping the tax rate to 15.64% in January 2022 would have kept the trust fund solvent through 2096, according to the Board of Trustees.
Of course, the trustees are not suggesting time travel, but merely expressing the magnitude of the problem. If the payroll tax rate had been 3.24 percentage points higher last year -- meaning employees and their employers would have contributed an additional 1.62% in taxes -- the long-term deficit would have been erased. Unfortunately, the longer Congress waits to make changes, the larger those changes will need to be. If lawmakers delay until 2035, the trustees estimate a 4.07% increase in the payroll tax rate will be necessary.
The Congressional Budget Office (CBO) has a more pessimistic outlook. The CBO believes the Social Security trust fund will be depleted by 2033, two years earlier than the trustees have forecast, and that the payroll tax rate would need to rise 4.9% to 17.3% to maintain solvency through 2096. That means employees and their employers would both pay an extra 2.45% in taxes.
Reduce Social Security benefits
Congress could also overcome the deficit by reducing Social Security benefits. The cut could be applied evenly across all current and future beneficiaries, or it could be targeted at a specific cohort. For instance, most Americans support reducing benefits paid to high earners (i.e., those with income in the top 20%), according to research from the University of Maryland. But that change alone would not solve the problem.
The Board of Trustees says all benefits needed to be cut by 20.3% in January 2022 to keep the trust fund solvent through 2096. That figure is larger now. And if lawmakers delay until 2035, a benefit reduction of 24.9% would be necessary. However, the CBO once again has a more pessimistic outlook. It estimates that an immediate and permanent benefit cut of 26% would be required to offset the long-term deficit.
The long-term solution will probably split the difference
To recap, the Social Security program must either increase revenue or decrease spending (or both) to avoid trust fund depletion. Raising the payroll tax rate and cutting benefits are just two ways to achieve those ends, but they are by no means the only answers. Many politicians have already proposed changes to Congress, and most of that legislation attempts to solve the problem with a combination of revenue-boosting and benefit-cutting measures. In other words, workers and beneficiaries are likely to shoulder the burden together.
