What You Need to Know
- A tax increase could have solved the funding gap decades ago, but Congress never likes to raise taxes.
- Social Security trust fund bonds are, in effect, IOUs the government has written to itself. This is not confidence-inspiring.
- Creative policymaking could lead to a more targeted, more effective Social Security plan.
It’s no secret that Americans worry about the future of Social Security. Only 35% of Americans said that they were “very” or “somewhat” confident that Social Security would pay them at least as much as today’s retirees receive when surveyed by the Employee Benefit Research Institute in 2016.
Thirty percent of Americans said they were “not very confident” in Social Security, and 33% said they were “not at all confident” in the program that provides the largest source of income for most Americans in old age.
By contrast, 81% of Americans said they were “somewhat” or “very” confident in their retirement accounts as a way to attain retirement security in a 2015 survey conducted by the Investment Company Institute.
The Social Security story is familiar: An aging population driven by lower birthrates and increased life spans means fewer workers and more retirees, a recipe for insolvency in a “pay-as-you-go” program that transfers taxes from workers into benefits to retirees.
What Your Peers Are Reading
One could look at a news article from the early 1990s, and it would read very similarly to today’s media coverage: As the baby boomers retire at the rate of 10,000 per day, Social Security will draw down the assets in its trust fund and, come the early 2030s, be unable to pay the full benefits it has promised.
Without increased revenue flowing to Social Security, benefits could be cut by 22% when the trust fund is exhausted. Americans are understandably skeptical they will receive the full benefits they are owed.
The Current Status
But is all this gloom and doom regarding Social Security’s future justified? It’s worth catching up on where Social Security benefits stand today.
Progressive activists claim that Social Security benefits have not been increased in nearly half a century, while forgetting 1977 congressional legislation enacting automatic benefit increases, not merely for the cost of living after retirement, but for increases in real wages before retirement.
Social Security Administration data shows that, in the past two decades alone, the average benefit collected by a new retiree has increased by 32% above inflation. While Social Security is an imperfect safety program, Census Bureau research has found that the share of retirees with sub-poverty-level incomes dropped from 9.3% in 1990 to only 6.3% in 2015.
So, whatever financial troubles Social Security faces and however Congress chooses to address them, older Americans are starting from a stronger base than in the past.
Moreover, while a strict reading of the law states that Social Security must cut benefits when the trust fund is exhausted, that doomsday scenario assumes that Congress would stand idly by. Recent history shows how unlikely that is to happen.
In 2016, the trust fund for Social Security’s Disability Insurance (or DI) program was projected to run dry. In the years leading up to 2016, we read of the problems facing the DI plan, in particular the steadily rising numbers of disability beneficiaries even as the share of Americans reporting a work-limiting disability remained steady.
The DI fund’s projected insolvency was seen as a tipping point for Congress to finally enact reforms, given research concluding that many DI beneficiaries could continue to work.
What actually happened? Congress, including both Republicans and Democrats, voted to shift some of the 12.4% Social Security payroll tax from the retirement program to the disability program, a move that delayed the DI fund’s insolvency as well as pushing substantive reforms to the back burner.
If Congress were to not allow a single penny of cuts to disability benefits, not to mention failing to enact a single meaningful reform, what are the chances that the far more numerous and politically powerful retirees will be subjected to a 22% across-the-board cut?
I will reach retirement age just as the trust fund is projected to run out, and benefit cuts aren’t high on my list of worries.
Astute readers may note that while politicians certainly don’t like cutting Social Security benefits, they also don’t like raising taxes. If they did, Social Security’s funding gap would have been solved via a tax increase decades ago.
And yet Social Security’s looming insolvency means Congress seemingly must do one or the other. The resolution to this conundrum lies, strangely enough, with the Social Security Trust Funds — or, more accurately, the lack of their stability.
Trust Fund Update
As fiscal watchdogs pointed out as early as the 1980s, the Social Security Trust Funds don’t actually make it easier for the government to pay benefits. The trust funds consist of special-issue non-tradable U.S. Treasury securities that are held in three-ring binders in a locked file cabinet in West Virginia. By itself, that is not confidence-inspiring.
These trust fund bonds are, in effect, IOUs the government has written to itself. When Social Security was running payroll tax surpluses, from the mid-1980s through 2009, the federal government took those surpluses and spent them on other things, giving Social Security bonds in exchange.
Today, when Social Security trades in those trust fund bonds to help pay full benefits, the federal government must come up with the money to pay them, which entails either higher taxes, lower spending on other programs, or higher federal debt.