Social Security is in crisis, and the road to recovery will likely be painful for millions of Americans. To better understand the problem, as well as possible solutions, it helps to take a quick glance back at the program’s history.
The Crisis in a Nutshell
Social Security was created in 1935 as a safety net for the elderly, unemployed and otherwise disadvantaged during the Great Depression. Since then, the basic structure has stayed the same: Retirees draw benefits that are funded by the payroll taxes of employees.
Contrary to popular opinion, Social Security is not self-funding; rather, the balance of the program’s surplus funds ebbs and flows based on two main factors: the number of workers paying into the system and the number of people drawing benefits.
In recent decades, the two trust funds that comprise Social Security’s reserves have benefited from the massive influx of baby boomers to the workforce (see chart). Today, however, as more boomers are retiring, reserves are falling. The effect of COVID-19 has only exacerbated this trend, as skyrocketing unemployment has translated into fewer workers paying into the system and more seniors choosing to claim benefits early. The University of Pennsylvania’s Wharton School now warns that Social Security could run dry as early as 2032. In the absence of significant change, benefits will be cut to 79 percent of existing levels at that time.
The Fix Will Not Be Fun
The formidable task of fixing Social Security lies with Congress, which can either raise taxes or cut benefits to manage the situation. Cutting benefits would be vastly unpopular for lawmakers. Instead, Congress could raise the full retirement age (currently 66 for those born before 1955). This makes sense given that life expectancies have grown significantly since Social Security first began. Congress could also reduce the cost of living adjustment (COLA), which is used to increase benefits annually to keep pace with inflation.
On the tax side of the equation, Congress might elect to increase payroll taxes or expand the benefits that are subject to taxation. Currently, clients earning more than $25k for single filers ($32k married filing jointly) pay ordinary income tax on their Social Security benefits. Congress could also decide to raise funds by increasing the net investment income tax. To date, nothing has been done to address the problem. The longer Congress waits to act, the more extreme the solution will need to be.