- According to the latest CBO projections, $1 trillion-plus budget deficits have arrived and are...
Closing the gap: plans to ensure a future for Social Security
- Social Security benefits and administrative expenses are projected to exceed the program’s total income this year, with reserves expected to run out in 2034.
- Proposals to fix Social Security tend to fall along partisan lines, with Democrats wanting to increase revenue and Republicans wanting to reduce expenditures.
- Even though the problem grows worse ever year, statements from President Trump and GOP congressional leaders suggest that reform is unlikely due to political costs.
An unsustainable course
With 2018 reaching its political peak in today’s midterm elections, lawmakers and news outlets alike are caught up in the horserace of immediate electoral gains. What isn’t often mentioned on the campaign trail, however, is that every federal election also offers voters an opportunity to consider America’s long-term, systemic fiscal challenges, and to elect lawmakers who are ready to address those issues.
One such challenge in Social Security. Due to changing demographics from retiring Baby Boomers and a declining birthrate, the program is on an unsustainable course starting this year, when benefits and administrative expenses are projected to exceed the program’s total income.
Thanks to a $2.9 trillion surplus collected over the decades when Social Security has enjoyed greater revenue than costs, there is no immediate crises. The program is nowhere close to going bankrupt. However its vast reserves are only projected to hold out for about 16 years. At that point, The New York Times reports, the resulting shortfall will require an immediate 20 percent cut to benefits across the board to sustain Social Security’s payouts.
This trend is especially worrisome given how much American retirees depend on this New Deal-era safety net. Social Security was originally intended to be part of a “three-legged” stool of retirement, along with pensions and savings, but over the years that leg has become increasingly like a single pillar. Currently it keeps more than 22 million people above the federal poverty line, according to the Center for Budget and Policy Priorities.
“With pensions vanishing and the savings rate dismal, millions of retirees now rely on Social Security for a big slice, if not most, of their income,” the Times said. Monthly checks currently average $1,413. For Americans currently receiving Social Security, a little more than one in three depend on that check for 90 percent of their income, and more than three out of five lean on it for at least half their income, according to a report from the Social Security Administration.
Plans to close the gap
This raises two questions: How hard will it be to close the gap to ensure Social Security’s solvency, and what plans are there for doing it?
Because Social Security is a federal program with clear-cut rules, the responsibility and power to change the program falls squarely on Congress. Generally speaking, current proposals to reform Social Security and set it on a more sustainable path fall into two basic camps: raise additional revenue (which Democrats tend to favor) or reduce long-term expenditures (which Republicans tend to support). Raising revenue to restore solvency to the program for the next 75 years would require an immediate increase of the payroll tax from 12.4 percent to 15.2 percent, according to James C. Capretta, a resident fellow at the American Enterprise Institute, while reducing expenditures would require cutting benefits on a permanent basis by 17 percent.
Multiple reforms have been proposed in Congress. More than 170 House Democrats, for instance, have supported a bill that would increase Social Security benefits by around 2 percent and set a minimum benefit for low-income earners. It would pay for these increased expenditures primarily through a 1.2 percent increase of the payroll tax over the next 24 years.
On the Republican side of the House, Texas Congressman Sam Johnson introduced a bill in 2016 that would gradually raise the age at which retirees become eligible to receive benefits to 69 years old. It would also tweak the benefit formula so that the highest earners receive fewer benefits and the lowest earners receive more, among other things.
Over in the Senate, Senator Patty Murray, D-Wash., introduced a bill this year that would change the benefits system to provide more help for divorced spouses (primarily women), widow(er)s, children, and people with disabilities. Murray’s bill would pay for these changes and address the coming shortfall with a special payroll tax for high income earners.
The agency itself has also weighed in with potential solutions. In September the Social Security administration releasing an overview of various provisions that would help reduce the projected shortfall such as cost of living adjustments, changing the retirement age, and raising payroll taxes.
Prospects for change
Congress has not made significant changes to Social Security since 1983, when both Republicans and Democrats had to make concessions to close a shortfall. Today, there is little reason to expect significant movement on the issue from the White House and Congress. Writing about Social Security for USA Today last July, The Motley Fool’s Sean Williams explained why by pointing to a quote from Donald Trump’s speech at the 2013 Conservative Political Action Conference.
“As Republicans, if you think you are going to change very substantially for the worse Medicare, Medicaid and Social Security in any substantial way, and at the same time you think you are going to win elections, it just really is not going to happen,” Trump said. “What we have to do and the way to solve our problems is to build a great economy.”
It’s important to note that this was years before Trump would begin his presidential campaign, but his speech reflects the simple political reality that any fix to Social Security will mean that either taxpayers, beneficiaries, or both will lose. Given that the program is deeply popular across the political spectrum — a 2017 Pew survey found that 86 percent of Republicans and 95 percent of Democrats supporting maintaining or increasing spending — significant changes to it are unlikely to curry favor with voters.
In 2018, the now-President Trump has not made any changes to Social Security, yet he is asserting on the campaign trail that his administration is making the program strong and that it will not cut spending. In Congress, Speaker of the House Paul Ryan, long an advocate for reforms to make entitlement sustainable, said as recently as September that good reforms “can mean that we can better perform the mission of these important programs, health and retirement security, without bankrupting the country.”
Senate Majority leader Mitch McConnell, however, said in an interview with Bloomberg News last month that the unwillingness to address deficits and debt driven by entitlements is a “bipartisan problem,” implying that the GOP won’t move forward on significant reforms without at least some support from Democrats because the political backlash would be too great.
And that, analysts and experts widely agree, is just the problem.
“Time and again, lawmakers have demonstrated a penchant for sweeping issues under the rug until the 11th hour,” wrote Williams, “and it looks like Social Security, which stands 16 years away from disaster, will be no different.”
Capretta echoes this sentiment. “Taking all of this into account, it is obvious that Congress won’t be passing entitlement reform legislation anytime soon,” he wrote in RealClearPolitics earlier this year. “Republicans say they know the problem is entitlement spending but won’t do anything about it because they fear the Democrats. The Democrats respond by saying even a politician who thinks entitlement reform is necessary, but does nothing about it, should get thrown out of office.”
Such deference to addressing entitlement spending, however, will eventually come with even steeper political costs, because passing a fix to Social Security will only get more painful as time goes on.
“When Congress last reformed Social Security back in 1983, it raised the full retirement age from 65 to 67 – but not starting until 2000 and not reaching 67 until the early 2020s,” American Enterprise Institute scholar Andrew Biggs explained in Forbes earlier this year. “That’s plenty of warning, and as a result we don’t hear much protest today as Americans put off claiming benefits a little bit longer. But raise the retirement age starting today and implement the change quickly and it’s a whole different story. It’s a meaningful benefit cut without much time to react.”
Americans spend their entire careers paying into Social Security, planning for retirement and counting on the program’s payments when they retire. Changes to the system now would give them more time to adapt their financial priorities and plan for a secure and prosperous future, rather than experiencing a hard cut of more than a fifth of their benefits within the next generation.
Image Credit: “Social Security Administration Building in Downtown Joliet” by Paul Sableman is licensed under CC BY 2.0