The Social Security program is in desperate need of reform, and Washington lawmakers know it. Even so, Congress has sidestepped the politically fraught issue for years. Both parties have instead resorted to vague platitudes and empty promises, choosing not to rock the boat for fear of alienating voters.
For instance, President Joe Biden and House Speaker Kevin McCarthy have rejected the idea of benefit cuts and touted their commitment to strengthening Social Security, but neither politician has provided much detail. Even worse, Biden and McCarthy are ignoring historical precedent that implies benefit cuts are unavoidable.
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The clock is ticking on Social Security reform
Social Security operated at a $22 billion loss last year, its second consecutive annual deficit. That means the program spent more money paying benefits than it took in from taxes and trust fund interest. Worse yet, the Board of Trustees says Social Security will continue to burn money indefinitely until Congress makes changes, and the necessary scope of those changes becomes progressively larger each year that lawmakers delay.
What caused the problem? The ratio of workers to beneficiaries has fallen precipitously over the years, so that fewer taxpayers now support more Social Security recipients. In other words, the program is buckling under the weight of the aging population.
According to the trustees, that problem could drain the trust fund by 2034, one year earlier than previously expected, eliminating one of two revenue streams that keep Social Security afloat. Should that happen, the remaining revenue stream (taxes) will cover just 80% of scheduled benefits. That means benefit cuts of at least 20% will happen automatically if the trust fund becomes insolvent in 2034.
Congress has resorted to benefit cuts in the past
Social Security's financial problems are old news at this point. Since 1983, the Board of Trustees has regularly published reports warning the American public that the trust fund is headed for depletion. Congress has already stepped in on several occasions to delay the problem, and the stopgap solutions put in place by lawmakers have generally included benefit cuts in some form.
Social Security ran a deficit between 1975 and 1981, prompting Congress to commission a study on the financial status of the program. In a report published in 1983, Alan Greenspan and his colleagues said the trust fund could run out of money within months. That set the stage for the Social Security Amendments of 1983, legislation that gave the federal government the power to tax up to 50% of Social Security income and gradually increased the full retirement age from 65 to 67. Both changes were roundabout benefit cuts.
A decade later, Congress again attempted to shore up the Social Security program with the Omnibus Budget Reconciliation Act of 1993, another piece of legislation that amounted to benefit cuts. Specifically, it gave the federal government even greater power to tax benefits, such that some high earners now pay taxes on up to 85% of their Social Security income.
Social Security benefit cuts are probably unavoidable
Here's the unfortunate truth: The Social Security program faces a $22.4 trillion funding shortfall over the next 75 years, and surmounting that hurdle without reducing benefits means taxpayers would shoulder the entire burden. I doubt Republicans and Democrats would agree on such a solution, nor do I think they would find common ground defunding the program. Instead, the long-term solution to Social Security's financing problem will likely involve a combination of tax increases and benefit cuts.
That said, retired workers probably won't see their Social Security benefits slashed outright. Many experts believe benefit cuts will be phased in slowly, and that they will probably exempt current beneficiaries, as well as individuals who will become beneficiaries in the next decade.
