Social Security: A crisis of procrastination Social Security: A crisis of procrastination\images\insights\article\social-security-card-money-small.jpg July 17 2023 July 14 2023

Social Security: A crisis of procrastination

Waiting for the program to go bust isn’t an option.

Published July 14 2023

Bottom Line

The Social Security trust fund will be depleted by 2034, according to its 2023 annual report—one year earlier than its board forecast in 2022. In recent years, the program has been redeeming its reserves to fund benefits faster than it’s collecting. And what it gains isn’t collecting much, either. The inflows are funneled into typically low interest-bearing Treasury securities. If the trust goes bust, benefits would be automatically cut 25% as they would now equal tax revenue. That could affect 71 million Americans.

This is not a surprise. Social Security’s problems have been a slow-moving train wreck for decades. But fixing it has long been viewed as a third rail of politics. Career survival is job number one for many of our elected officials in Washington, and they think supporting proposals to cut benefits or increase taxes to restore its solvency is akin to being electrocuted. But the program could be placed on a sustainable track through a combination of thoughtful planning, shared sacrifice and brave leadership. 

Demographic shifts President Roosevelt signed the Social Security Act into law in 1935 in the heart of the Great Depression to provide financial support for the elderly and disabled. But as the average lifespan then was 62 years of age, there were many more workers than beneficiaries. For every 40 people contributing to the Social Security system, only one person lived until age 65 to draw full benefits.

Blessed with improved medical care, nutrition and exercise, today’s life expectancy has soared, reaching 80 just before the pandemic in 2020. Yet the full retirement age has only grown to 67. That has shrunk the worker-to-retiree ratio to 3-1, and it is headed to 2-1 a generation from now, according to actuarial assumptions. Approximately 54 million retirees now receive benefits, with another 12 million disabled people who are under age 65. For 40% of these retirees, the payments comprise at least half their income, and for 15%, the benefits account for more than 90%.

It's all about the politics The solution to the insolvency crisis is relatively simple. It’s the politics that pose the biggest challenge because most potential solutions involve adjusting benefits or changing payroll taxes. That’s tripped up more than a few attempts to fix it, most notably:

  • Greenspan Commission President Ronald Reagan and Congress created the National Commission on Social Security Reform (the Greenspan Commission) in 1981 to reverse the deepening solvency crisis. This led to the Social Security Reform Act of 1983, which changed the tax and benefit formula. It raised the retirement age from 65 to 67 (phased in over 40 years). That alone pushed the trust fund to $3 trillion. 
  • Privatization efforts fail During his second term in February 2005, President George W. Bush attempted to put Social Security on a more secure path by partially privatizing it. The change would have allowed Americans the option to divert part of their Social Security tax into stocks and bonds, the rest going to their personal government accounts. With a lack of public support, Congress failed to pass it. 
  • Bowles-Simpson tabled In 2010, President Barack Obama empowered the Bowles-Simpson Commission to take a swing at the solvency issues, which the commission did by proposing to increase the Social Security payroll tax and by reducing benefits. But he tabled the legislation, likely because of concern the reform could harm his re-election bid in 2012. 
  • More demographics Not only are Americans living longer, but rapidly declining birth rates are exacerbating the demographic conundrum. In 1957, families averaged 3.6 children. Today, that rate is less than half, at 1.78 children per family, well below the population replacement rate of 2.1. This means fewer young workers supporting an large group of retirees.

Possible solutions To improve the solvency of Social Security for the next 75 years, Washington could phase in shared sacrifice with a half-dozen key proposals over the coming decades:

  • Increase and index the retirement age Raise the retirement age to 70 by 2040, and then index the full retirement age to future changes in life expectancy. People who are 50 or older now would be grandfathered.  We could narrow an estimated 14% of the long-term actuarial deficit by raising the retirement age by one year to 68, so an increase to 70 could eliminate an estimated 43% of the deficit. 
  • Increase tax rates and the wage cap Social Security is funded with a 12.4% payroll tax (paid half each by the employee and the employer) on wages up to the taxable earnings cap, which increased by 9% this year to $160,200. This wage cap, which has soared by 25% over the past five years, is subject to an automatic annual adjustment, based on increases in the national average wage index.  
  • Fix the inflation calculation Cost-of-Living Adjustments (COLAs) are made with the current-dollar CPI, which economists believe overstates inflation by a quarter-point annually, compared with the chained price-index CPI. That change in how wage benefits are adjusted could fix an estimated 20% of the long-term trust fund deficit. In 2023, for example, the COLA soared by 8.7%, due to the worst inflation in the U.S. economy in 40 years. 
  • Means testing benefits We’re not quite sure where to draw the line, but we’re reasonably certain that Bill Gates, Warren Buffet and Mike Bloomberg don’t need a monthly check from Social Security.
  • Seek better returns on trust assets Although he couldn’t get his proposal through Congress, we think President Bush was on the right track. A traditional 60/40 portfolio mix with Blue Chip dividend stocks and Treasury bonds would have generated a greater annual return over the past century than the negligible returns generated by Treasury’s management of the assets.
  • Expand legal immigration Given our demographic challenges, expanding legal immigration would increase our pool of workers, boosting GDP and contributing to the Social Security trust fund through their tax payments. 

Kicking the can down the road won’t get it done this time Since the Greenspan Commission’s successful reforms under President Reagan 40 years ago, Congress has largely punted on making any relatively modest incremental tweaks to the Social Security program to keep its solvency on track. That’s genuinely regrettable, as now we must make more meaningful decisions on raising the retirement age, tax rate increases and privatization, among other changes, to pull the program back from the brink. This crisis of procrastination can be resolved with a balanced solution that gradually phases in a variety of reforms over time in shared sacrifice.

Research assistance provided by Federated Hermes summer intern Audrey Margolies.

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