Any proposal to close Social Security’s financing gap should consider the creation of a trust fund that could earn enough interest to keep the program running for the next 75 to 150 years, according to a new paper from the Center for Retirement Research at Boston College.
As it stands now, Social Security is structured a pay-as-you go program whereby taxes on the income of current workers (and their employers) are used to pay benefits to current retirees. Due to payouts that exceeded what retirees had paid into the program when it began in the early 1930s and the declining ratio of workers to retirees, the program’s current trust funds — there are two, one for retiree benefits and one for disability benefits — are together poised to deplete their reserves by 2035. At that point, retiree benefits would be reduced by about 25%.
“The full amount of the shortfall can be attributed to the fact that the program does not have a trust fund producing interest,” according to the center’s report written by Director Alicia Munnell, Senior Research Advisor Wenlian Hou and Associate Director of Research Geoffrey Sanzenbacher. It calls that interest-producing fund “The Missing Trust Fund.”
Clearly something needs to be done to shore up the program to maintain benefits at current levels. Most of the suggested remedies to date include raising the FICA tax that funds Social Security, eliminating the cap on income subject to that tax (currently $132,900) and cutting benefits, or a combination of two or more of these ideas.
Policymakers could raise taxes permanently if they wanted to maintain current benefit levels or they could increase taxes temporarily until a large enough trust fund is built up to fully fund the program for 75 to 150 years, according to the center’s report.