Millions of Americans are worried about Social Security—whether they will receive the full amount of their promised retirement benefits in the years to come. And many young people believe—incorrectly, in my opinion—that Social Security will no longer support them when they retire.
The issue is considered so sensitive in Washington that most politicians are careful to avoid it. The Social Security Trust Funds' most recent annual report in May said that if no action was taken, benefits would have to be cut by about 20 percent starting in 2033.
But if you stop and look at the problem more closely, you will see that the measures to reform social security are not a big deal.
That's not a bold claim. It's based on hard numbers calculated by Alicia Munnell, an economics professor at Boston College and one of the country's leading experts on Social Security.
In order to maintain full social security benefits in the 2030s and beyond, a 3.5 percentage point increase in the social security contribution from the current 12.4 percent – which is borne equally by employers and employees – is necessary, Professor Munnell explained in a telephone conversation.
She also stressed that most of the promised benefits would still be paid even if Congress did nothing at all to improve Social Security. That's because the money for Social Security checks comes largely from the payroll taxes that working people pay regularly. Revenue from the system's dwindling trust funds supplements that. Even if the trust funds drop to zero, enough money from taxes will flow into the system to pay about 80 percent of the benefits. But Professor Munnell doesn't expect that to happen.
Why there will be a solution at some point
Benefits for people who are already retired or about to retire are unlikely to be cut because older people vote in large numbers. Cutting off their promised benefits would be politically dynamite, as President Ronald Reagan discovered in the 1980s when his administration endorsed such a move, only to quickly backtrack.
Eventually, the political class will find a way to avert this disaster. Millions of people are already desperate and confused about retirement. It would be much better for everyone if the repairs were made sooner rather than later. Given the flaws in the rest of the country's retirement system, preserving — not cutting — Social Security benefits is critical to the well-being of current and future retirees, Professor Munnell said.
Still, a tax increase on Social Security will never win widespread support. The presidential candidates are not even openly discussing it, although both Biden and Trump's campaign teams say they are committed to keeping Social Security intact.
In an election year, candidates are not in a hurry to solve a problem that will only hurt people financially in the next decade and will result in a tax increase – no matter how small.
“It's going to be difficult because you have to raise people's taxes before they see anything concrete,” said Professor Munnell. “You have to raise their taxes so they get what they think they should get anyway. And that's why I worry that we have a political tendency in this country to go right to the edge and not act until we get there. That's what we did in 1983,” the last time Social Security underwent major reform.
Numbers, large and small
Professor Munnell, 81, has been doing serious research on Social Security since the 1960s. She officially covered Social Security as assistant secretary of the Treasury for policy from 1993 to 1995. She has directed the Center for Retirement Research at Boston College since its founding 26 years ago and produces her own clear annual reports on the state of Social Security funds shortly after the Social Security trustees release their reports.
Although she deals with the complexities of Social Security, she approaches the matter with common sense and finds answers that are easy to understand.
How big is the problem of the funding gap in social security? Depending on how you look at the numbers, it can appear large or small.
If you want to scare people, she said, you have to point to the estimated total size of the gap between costs and revenues over the next 75 years: $22.6 trillion. That's a lot!
But the US economy is huge and growing. Compared to the entire economy over the next 75 years, the funding gap for Social Security is tiny: it amounts to just 1.2 percent of gross domestic product.
The key factor to keep an eye on is payroll taxes, as they account for the majority of Social Security's funding. As a fraction of the total amount raised through payroll taxes, the funding gap is about 3.5 percent.
That's why Professor Munnell recommends an additional payroll tax of 3.5 percentage points, which should be paid in addition to the 6.2 percent currently paid by employers and employees. (Self-employed people pay the entire 12.4 percent tax themselves.)
All you have to do is raise taxes by that amount without changing anything else, she said, and much of the problem will be solved.
Roots of the problem
Baby boomers of my generation are retiring in droves. At the same time, because of the long-term decline in the birth rate, relatively few people of working age are paying taxes to fully fund the system. Immigration has helped strengthen the workforce, and much more immigration would solve the problem, but given American politics, it would be unwise to count on it.
These demographic problems were well known in 1983, during the Reagan administration. At that time, a bipartisan commission headed by Alan Greenspan, later chairman of the Federal Reserve, drafted the outlines of a legislative package that would temporarily put the system on a sound financial footing.
Congress and the president eventually agreed on some key changes, including raising the payroll tax to the current rate, making subtle cuts to Social Security benefits, and creating a surplus in the trust funds, which have fluctuated in size since Social Security was created in 1935. The idea was that as the baby boomer generation retired and more money flowed out of Social Security each year than came in, the trust funds would make up the difference.
Stephen C. Goss, chief actuary of the Social Security Administration, said in testimony before Congress last year that officials in 1983 expected the trust funds to last until the mid-2050s. “It was known that further action would be needed between now and then,” he said.
Instead, the day of reckoning comes about 20 years earlier.
Two things went wrong, says Goss. The first was the severe recession from 2007 to 2009, which disrupted long-term forecasts.
Second, and more importantly, income inequality in the U.S. has risen much faster than economists expected. Incomes of the top 6 percent “rose much faster than the overall average,” Goss said. In 1983, the Social Security tax was imposed on 90 percent of the nation's wage income. Now, with taxable wages capped at $168,600, only about 82.5 percent of the nation's wage income is taxed for Social Security, he said. The cap would have to be raised above $300,000 to return to the 90 percent coverage of the Reagan administration.
Such an increase in the tax ceiling – that is, a higher tax on the wealthy and a lower tax on everyone else – would, according to estimates by the social security system, reduce the tax increase needed to fully finance social security from 3.5 percentage points to just 2.45 percentage points.
Many options
Professor Munnell's solution is simple and straightforward. It would install an automatic circuit breaker — which could temporarily freeze cost-of-living adjustments or adjust taxes or benefits — to prevent the system's finances from ever becoming completely unbalanced again.
Your proposals make sense to me, although I would take into account growing income inequality, raise the wage cap, and reduce the overall payroll tax increase. This is hardly a radical idea. It would be a return to the bipartisan spirit of Social Security reform that President Reagan, a famously conservative Republican, championed along with Speaker Thomas P. (Tip) O'Neill Jr., the Massachusetts Democrat.
There are countless ways to fix the system, and once serious efforts are made, many of them will be discussed.
But cuts to benefits should be ruled out, said Professor Munnell. Only about half of workers in the United States are covered by any retirement plan other than Social Security. Even for those covered by company pension plans, the overall retirement savings picture is not pretty. The financial services industry is more than willing to step in with solutions, but always for a fee.
In fact, Social Security is just as important to most people today as it was 40 or 50 years ago.
The White House and Congress can wait until the 2030s, when benefit cuts are imminent and public anxiety about retirement will increase.
Still, there is no doubt that millions of people would be better off if Social Security were fixed and their benefits secured, and if they were fixed now.