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Doing This Would Instantly Fix Social Security, New Report Finds

Stop me if you've heard this before: Social Security is in trouble.

Chances are you've stopped me, or picked up on the thick and obvious sarcasm, since the Social Security Board of Trustees have been warning about insufficient long-term (75-year) revenue collection, relative to projected expenditures, with every annual report since 1985.

Just a few weeks earlier, the trustees issued their newest annual report on the short-term (10-year) and long-term outlook of America's most important social program; and, like the numerous reports before it, Social Security's "Judgment Day" is creeping closer.

Two Social Security cards partially covering up a hundred dollar bill.
Two Social Security cards partially covering up a hundred dollar bill.

Image source: Getty Images.

Ongoing demographic changes are weakening Social Security

According to the report, Social Security is expected to begin expending more than it collects in revenue in 2020, narrowly avoiding this unwanted inflection point in 2019, with an estimated $1 billion net cash surplus. This expected shift (i.e., from net cash surpluses to net cash outflows) is the result of a number of ongoing demographic changes, including increased longevity, growing income inequality, lower birth rates, and the retirement of boomers from the workforce.

It's beyond 2020 when things start to get really ugly. On one hand, Social Security has built up $2.9 trillion in asset reserves (i.e., its aggregate net cash surpluses) since its inception. This provides some degree of buffer if the program begins expending more than it collects. On the other hand, the magnitude of this net cash outflow is expected to grow with each passing year. By 2035, the latest trustees' report forecasts that this $2.9 trillion will be completely exhausted.

The silver lining for seniors, if there is one to be found in this mess, is that Social Security is in no danger of going bankrupt or being insolvent. The recurring revenue it'll receive from its 12.4% payroll tax on earned income, as well as from the taxation of Social Security benefits, will provide plenty of revenue for disbursement to eligible beneficiaries.

But, to be crystal clear, it doesn't mean the existing payout schedule, inclusive of cost-of-living adjustments (COLAs), is sustainable beyond 2035. If Social Security's asset reserves are gone, a benefits cut of up to 23% may be required for then-current and future retired workers to sustain payouts from the Old-Age and Survivors Trust.

In terms of total shortfall, the trustees foresee the need to bridge a $13.9 trillion gap between 2035 and 2093, which is $700 billion higher than the long-term shortfall forecast in the 2018 report.

Two Social Security cards lying atop a W2 tax form that's highlighting payroll taxes paid.
Two Social Security cards lying atop a W2 tax form that's highlighting payroll taxes paid.

Image source: Getty Images.

Doing this would instantly resolve Social Security's $13.9 trillion cash shortfall

Clearly, lawmakers need to do something very soon to shore up Social Security for current and future retirees. The big question remains what that fix should entail.

But according to the newly released trustees' report, there's a solution that could be implemented, with Congressional approval, which would instantly resolve Social Security's $13.9 trillion cash shortfall over the next 75 years.

Contained within every trustees report is a figure known as the "actuarial deficit." In layman's terms, this figure describes how much the payroll tax would need to increase today in order to completely cover the funding shortfall over the next 75 years (assuming the current payout schedule, inclusive of COLA), while also leaving enough in asset reserves to cover one full year of expenditures by 2094 (i.e., a trust fund ratio of 100%). In the 2019 report, the actuarial deficit was 2.78%, which was 6 basis points lower than in the previous years' report.

Essentially, the trustees' report estimates that if Congress were to increase the current 12.4% payroll tax on earned income by 2.78% to 15.18%, Social Security's cash shortfall would go away over the next 75 years. Although we'd still see a decline in the trust fund ratio by the time 2093 rolls around (it was 289% in 2018), the program should remain sufficiently funded so as to not to require a reduction in benefits for future retirees.

A folded hundred dollar bill, with Ben Franklin's eyes peering out through a gap.
A folded hundred dollar bill, with Ben Franklin's eyes peering out through a gap.

Image source: Getty Images.

Here's why lawmakers and the public aren't big fans of this approach

If raising the payroll tax by 2.78% provides an easy resolution to Social Security's cash shortfall, you're probably wondering why it hasn't been implemented by Congress or pushed for by the public.

With respect to Congress, the reasoning is simple. Lawmakers understand that there is no such thing as a Social Security fix where everyone comes out a winner. Fixing Social Security, either by raising revenue or reducing benefits, means some group of people, be it the well-to-do, current working-age Americans, or future generations of workers, will be worse off than they were before. That's a potential recipe for elected officials to lose votes in an upcoming election, which has kept Congress from actively pushing for reform.

And when it comes to the American public, they overwhelmingly prefer passing along any tax increases exclusively to the rich. The 12.4% payroll tax on earned income caps at $132,900 in 2019, with all earned income (wages and salary) beyond this point exempt from the payroll tax. Since more than 90% of workers will earn less than this amount in 2019, they're paying tax into Social Security on every dollar they earn. Thus, increasing or eliminating the tax cap would have no impact on more than nine out of 10 working Americans.

But that's not what the trustees are forecasting with the actuarial deficit. They're intimating a 2.78% additional payroll tax on all working Americans earning between $0.01 and $132,900. Even though polling has shown that the public favors raising revenue through increased taxation over any sort of benefit reduction, they're almost certain to be far less willing to accept a broad-based payroll tax hike of this magnitude compared to simply raising the tax rate on the rich.

Also, if you're curious as to why the public's preferred fix hasn't been implemented, it has to do with the wealthy already paying their fair share as a result of caps existing on monthly benefits at full retirement age.

Thus, we have our dilemma. A fix exists that could end Social Security's cash shortfall right now, but the pathways to that resolution are lined with hurdles that, as of now, appear insurmountable.

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