There’s no doubt that the Social Security program is in a worrying financial position, pressured by an aging population and a growing imbalance between the number of workers paying into the program and the number of beneficiaries drawing checks.
The 2025 Social Security Trustees report shows the key trust fund used to support payments to retirees will be exhausted by 2033 — just eight years from now. When combined with the disability trust fund, the reserves will last until 2034, at which time a roughly 20% benefit cut would automatically apply under current law.
But according to a new analysis published by Andrew Biggs, senior fellow at the American Enterprise Institute and former deputy commissioner of Social Security, one primary cause of the program’s looming insolvency has long been overlooked: the decision to index retirees' inital benefit amounts to long-term wage and economic growth.
Over the long term, Biggs writes, Social Security faces an unfunded obligation that tops $26 trillion. Generally, this massive funding gap is discussed as the inescapable outcome of an aging population, combined with broad societal shifts in how compensation is structured and taxed.
“But the real story is more surprising — and more solvable,” Biggs says.
According to Biggs, neither the aging population narrative nor the compensation narrative tells the full story about how Social Security’s financial challenges arose and what policymakers might do to address them. And once the full story is recognized, he argues, the argument for simply raising taxes to keep Social Security solvent is weakened.
Outsize Benefit Growth
As Biggs recounts, it is true that the U.S. population is aging, and that means a smaller number of workers is supporting a larger number of retirees. Specifically, the number of workers per Social Security beneficiary has declined from 3.2 in 1977 to 2.7 today. The Trustees project that by 2050, there will be just 2.2 workers per beneficiary.
At first blush, Biggs says, that shift alone would seem to explain much of Social Security’s imbalance.
“But one fact is ignored,” Biggs notes. “Because real wages have been increasing, smaller numbers of workers could still support a larger number of retirees if those retirees’ benefits weren’t increasing at the same rate as wages.”
And that's how the program worked for more than 40 years, he writes.
“Benefits were increased as-needed and as-affordable, with Congress considering the adequacy of benefits as well as the other financial demands on the federal government,” Biggs writes. “But in 1977, Congress enacted and President Jimmy Carter signed a major change to the Social Security benefit formula.”
Specifically, Biggs says, the 1977 Social Security amendments put the benefit formula “on autopilot,” dictating that the initial benefits received in retirement would increase from year to year at the rate of national average wage growth.
“As a result, the average Social Security benefit today is about 70% higher than the average benefit paid in 1977, even after adjusting for inflation,” Biggs notes. “This approach, called ‘wage-indexing,’ largely took economic growth out of Social Security’s funding equation.”
As a result, even if the economy grows faster and both wages and payroll taxes increase, benefit growth will almost immediately offset any positive effect on Social Security funding.
An Unfortunate Legacy
Ultimately, Biggs explains, this wage indexation of initial benefits is why even high rates of long-term economic growth have not kept Social Security solvent.
“This was a policy choice,” Biggs says. “Demographics didn’t have to be the main driver of Social Security’s costs. It was Congress in 1977 building economic growth into the benefit equation, that ensured demographics were all that was left.”
Biggs recalls that Congress altered Social Security’s benefit formula against the unanimous recommendations of an expert panel created to consider just that issue.
“The panel argued that adopting a slower rate of benefit growth would allow future generations to decide what benefit increases are appropriate and what tax rates to finance them are acceptable,” Biggs says. “Had the pre-1977 approach continued, Social Security would almost certainly be solvent today.”
Instead, Biggs says, Congress effectively gave away its power to adjust the growth rate of future benefits in a way that could have avoided the current insolvency dilemma.
“Instead, Congress made demographics destiny,” Biggs concludes. “And, in the process, has practically guaranteed that such a crisis will occur.”
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