The Social Security program is quickly burning money due to the rising cost of paying benefits, and the problem becomes more consequential with each passing year. Specifically, the long-term funding deficit exceeds $22 trillion, and Congress has about a decade to address the issue before benefits are cut automatically, according to the Board of Trustees.
To that end, Social Security reform could be a major talking point for presidential candidates as the 2024 election draws nearer. But groundbreaking revelations are unlikely. The frontrunners of both major political parties have so far navigated the issue with virtually identical strategies, promising to protect Social Security while accusing members of the opposite party of supporting benefit cuts.
In any case, voters should understand the problem and the potential fixes. Read on to see why benefit cuts could happen automatically in 2034 and to learn about two potential solutions most Americans support.
Image source: Getty Images.
Social Security benefits could be cut automatically in 2034
The six-member board of trustees oversees the financial operations of the Old-Age, Survivors, and Disability Insurance (OASDI) program, better known as Social Security. Among other duties, the board members make annual reports to Congress regarding the solvency of the OASDI trust fund -- the source of benefits for retired workers, spouses, survivors, and disabled workers.
The 2023 report estimated that the OASDI trust fund would be depleted by 2034, at which point only 80% of scheduled Social Security benefits would be payable. That implies automatic benefit cuts of at least 20% unless lawmakers intervene before the trust fund becomes insolvent. To be clear, that does not mean Social Security is running out of money.
Explaining the problem is simple. The number of beneficiaries is growing rapidly as the baby boomers retire, but the number of taxpayers is growing more slowly due to lower birth rates in subsequent generations. In other words, the cost of paying benefits is increasing faster than revenues from payroll taxes, so the Social Security program is losing money.
Resolving the problem is more complicated. Social Security reform is a politically fraught topic with no obvious answer, so politicians often speak in platitudes that lack substance. Indeed, Biden and Trump have promised to protect Social Security, but neither has outlined a detailed plan to keep the trust fund solvent.
Ultimately, there are only two possible solutions: Cut costs by reducing benefits or increase revenues by raising taxes. Yes, that is an oversimplification because there are many ways to reduce benefits and raise taxes, but the issue of Social Security reform effectively comes down to those options.
Most Americans prefer higher taxes over benefit cuts
A recent Gallup survey asked participants (adults aged 18 and older) to choose between tax hikes and benefit cuts as methods of protecting Social Security: 61% favored increasing taxes, 31% favored reducing benefits, and 8% had no opinion.
Similarly, a University of Maryland survey asked participants (registered American voters) to evaluate several Social Security reform measures. The vast majority of respondents supported two specific tax increases, as discussed below:
- Apply the Social Security payroll tax to income over $400,000: The income subject to Social Security payroll tax is limited to $168,600 under current law, meaning income above the limit is not taxed by Social Security. However, the University of Maryland survey found that 81% of registered American voters supported taxing wages over $400,000 in addition to those taxed by current law. That proposal would eliminate 63% of the long-term funding deficit, according to the Social Security Administration.
- Increase the Social Security payroll tax to 6.5%: Current law stipulates that employees pay 6.2% of their income (up to $168,600) to Social Security, and employers must match that figure for a total of 12.4%. But the University of Maryland survey found that 73% of registered American voters supported a higher payroll tax rate of 6.5%. That proposal would eliminate 15% of the long-term funding deficit, according to the Social Security Administration.
Here's the big picture: The Gallup survey suggests Americans prefer tax hikes to benefit cuts, and the University of Maryland survey identifies two specific tax hikes likely to win support among American voters. However, the proposed tax reforms would only eliminate about 78% of the funding deficit, meaning those solutions alone would not solve the problem.
To that end, lawmakers will likely shore up Social Security with a combination of tax increases and benefit cuts, regardless of promises made by presidential candidates. But current beneficiaries need not worry. Benefit cuts would probably phase in gradually and likely spare current Social Security recipients and anyone nearing retirement age, as they have in the past.
For instance, the amendments of 1983 simultaneously (1) increased taxes on self-employment income and (2) raised the full retirement age from 65 to 67 over several decades. That last change cut benefits by 13%, according to the Center on Budget and Policy Priorities, but it happened slowly and had no impact on current beneficiaries. Americans should keep that in mind as they listen to the presidential candidates discuss Social Security reform.
