In the 500 months – or 42 years – since Social Security’s trustees resumed warning of the program’s coming deficits, retirees have seen their checks arrive promptly. This luxury will soon come to an end absent significant reforms. After all, current benefits are calculated according to the same unsustainable formula that is leading to the depletion of the program’s trust fund six years hence.
The imminence of Social Security’s fiscal crisis is slowly registering with Congress. There needs to be a greater sense of urgency. This week, the Senate Finance Committee held a hearing on “Exploring Process Approaches for Addressing Social Security Solvency.” Lawmakers have little time left to contemplate how to act, but act they must – or else Americans’ benefits will be in grave danger.
Social Security’s fiscal outlook has deteriorated dramatically. In 1996, Henry J. Aaron of the Brookings Institution asserted that Social Security “is adequately funded for the next 30 years. It [in fact] reduces the federal budget deficit.” Three decades on, another Brookings scholar, Jessica Riedl, argues that, for the last 16 years, Social Security has contributed to budget deficits, adding $250 billion – or 0.8 percent of GDP – to this year’s $1.8 trillion shortfall. Moreover, the gap between the program’s revenues and benefit costs will widen to 1.4 percent of GDP within a decade. Worse, “Congress’s option of waiting until the last minute [before the trust fund’s exhaustion] and then using budget deficits to finance all future shortfalls would lead Social Security to add $48 trillion to budget deficits over 30 years,” Riedl warns.
Several factors render Social Security unsustainable.
The price index Social Security uses likely overstates inflation, resulting in inflated cost-of-living adjustments (COLA) over time. More importantly, the growth of initial benefits for new retirees surpasses even inflation. The ever-larger purchasing power of payouts to successive generations results from lawmakers’ 1977 decision to index Social Security’s base benefits to average wages, which, by virtue of productivity growth, have increased faster than the average price level.
Not only was the 1935 Social Security Act framed to give Americans “some measure of protection” against “poverty-ridden old age,” but it was also conceived under vastly different demographic assumptions. Life expectancy at age 65 is now roughly seven years longer on average than it was in 1940. But Congress last raised the full retirement age in 1983 by only two years. Furthermore, due to the Baby Boom generation retiring, Social Security now supports more than 70 million beneficiaries whose benefits are financed by payroll taxes paid by roughly 185 million covered workers, compared with roughly 43 million beneficiaries supported by 141 million workers 30 years earlier. The worker-to-beneficiary ratio has thus fallen from 3.3 to approximately 2.6 and is projected to reach 1.9 by 2075.
Needless to say, Congress must reverse the program’s current precarious path. And only Congress can do it. It can begin with something as modest and intuitive as slowing the automatic benefit expansions built into the current program’s design. A 2023 Hoover Institution study concluded that, had price indexing (instead of wage indexing) been enacted in 1977, it would have preserved the inflation-adjusted value of recipients’ initial benefits but averted the program’s looming insolvency. If implemented in 2032, indexing initial benefits to prices would close 74 percent of Social Security’s long-term funding gap—and even yield a surplus beginning in 2079—while maintaining the purchasing power of average starting benefits. Likewise, switching from the current COLA formula to a more accurate measure, such as the chained consumer price index, could close an estimated 16 percent of the long-term funding gap.
Lawmakers could also consider the Committee for a Responsible Federal Budget’s Six Figure Limit. This proposal would cap a couple’s combined annual Social Security benefits at $100,000 —affecting only the wealthiest 0.05 percent of couples today—and curtail future benefit growth largely for seniors with six-figure post-retirement incomes and million-dollar net worths. Although it would not fix the deficit by itself, such a change would starkly diverge from Congress’s decades-long inaction on entitlement reform.
Social Security’s trustees have long warned that “the retirement of the ‘baby-boom’ generation starting in about 2010” would cause Social Security costs “to increase rapidly” and produce imbalance in the 75-year program. The trustees urged Congress to address the imbalance “in a timely way.” Lawmakers had three and a half decades until the retirement trust fund’s projected depletion, “ample time to discuss and evaluate alternative solutions with deliberation and care.” Since then, they have enacted not a single Social Security reform aimed to improve program finances.
If left unreformed, Social Security will falter – either in 2032, when scheduled benefits would automatically, and indiscriminately for all retirees, fall by 22 percent, or later, if Congress uses deficit financing to postpone those cuts until a debt crisis forces lawmakers to abruptly cut spending, raise taxes, or likely do both at once. Without the luxury of “ample time,” the need for congressional action grows dire because of the dreary alternatives that would inevitably follow doing nothing.
