Social Security is the single largest program in the federal budget with outlays of $1 trillion — 25 percent of the budget. Social Security is a vital component of the American safety net. Without Social Security many retired and disabled workers — as well as survivors and dependents — would be without an adequate income, and in many cases without any income.
Recently Social Security spending has attracted headlines because Senate Majority Leader Mitch McConnell suggested that obligations now exceed current revenue; that unfunded liabilities were $14 trillion and reductions were necessary to maintain the integrity of the program, and because Social Security was contributing to the overall federal deficit and its mounting debt.
True, the 2018 Report of the Trustee of the Social Security Trust Fund (available online via www.ssa.gov) indicates that in 2018 Social Security began drawing down its fund reserves to help pay for benefits — and that by 2034 resources will not be sufficient to make full payments to recipients.
But in my judgment the Social Security funding problem can be addressed by making several logical adjustments. But first a few facts about the Social Security program are worth noting:
- 175 million people pay into Social Security at a payroll rate of 6.2 percent of salary; the employer pays a matching rate.
- 62.6 million people receive payments — old age and survivors (52.4 million) and people with disabilities (10.2 million). By 2050, 85 million folks will be eligible.
- The Fund currently has a surplus and has been loaning its surplus to the treasury’s general fund for many years — with a commitment to retrieve these loans with interest when expenditures exceed current revenues. These repayments will begin this year.
- The Fund will not be bankrupted as some suggest. According to the Trustees’ Report the Trust Fund will be depleted, including using all loan repayments, by 2034. Thereafter, the fund will collect sufficient revenues such that recipients will receive 79 percent of scheduled payments.
- The Fund’s insolvency is a function of an increase in life expectancy, decline in fertility rates, and a lower ratio of workers to retirees. For example, in 1950 it was 16 to 1; in 1960 5 to 1. Today it is 3 to 1 and by 2025 it will be 2.3 to 1.
- 48 percent of older couples and 70 percent of unmarried individuals depend on Social Security for more than 50 percent of their income; and benefits are modest — the average is $1,413 a month.
For those interested in reviewing an extensive list of options to address the Social Security problem, the Congressional Budget office (CBO) issued a report titled “Options for Social Security Reform.” (www.cbo.gov/publication/52471) The report discusses 37 options with the dollar impact of each. No individual option would create long-term stability for the program. Some options would affect all workers or beneficiaries similarly; others would have widely disparate effects, depending on a beneficiaries’ year of birth or lifetime earnings. The effects of many options would change if implemented at a larger or smaller scale or phased in more slowly or quickly.
In short, there are basically three options: increase taxes; reduce benefits; privatize the system. Each option is worthy of extensive analysis and debate, but for our purposes a few brief comments are appropriate. Some argue for gradually increasing the tax rate by 2 to 3 percent over a period of 20 years and reducing the annual cost of living adjustment (COLA). Others suggest increasing the retirement age to 70 or higher. Others cut monthly payments.
Another option is to privatize the system by moving from the current “defined benefit” model to a system where new beneficiaries and those over certain age (perhaps 50) are moved into a system for private accounts — think 401(k). There are several variations of this approach and in fact, President George W. Bush proposed such an approach in 2005. Some analysis at the time by the Urban Institute suggested it could be favorable but was very dependent upon the status of the individual (single, married, male or female); salary earned; and willingness to assume some risk. The option is not without merit, but it was ultimately abandoned, and I would suggest it has little chance of reappearing.
If lawmakers chose to cut benefits to solve the problem, dramatic reductions would be necessary. A reduction of up to 20 percent to current and future participants would be necessary to approach a solution. This type of approach is not desirable given the very negative impact it would have on the vast majority of folks who already receive only $1,413 a month.
I suggest a combination of the following:
- Eliminate the taxable maximum. Specifically, instead of taxing only the first $132,900 (the level in 2019) — individuals would pay Social Security on their full salary. Thus, an individual earning $1 million would pay on full salary rather than just $132,900. This approach, however, would not be sufficient as only 6 percent of the working population is impacted;
- A gradual increase in age to qualify for full benefits from 67 to 68.52 over a period of the next 10 years;
- An increase in the payroll tax rate of 1 to 2 percent over the same time line.
Additional analysis and number crunching is necessary to determine the exact combination, but such an approach would remove Social Security from the national agenda — with all its negative implications — and make federal budgetary decision-making simpler — and more importantly allow the focus to be where it is most critical — containing health care costs and developing a better national tax policy.
Rich Keevey is the former Budget Director for New Jersey, having been appointed by two governors from each political party. He held two presidential appointments — the deputy undersecretary of defense and the CFO at HUD. Currently he is a senior policy fellow at the Bloustein School of Planning and Policy, Rutgers University and lecturer at the Woodrow Wilson School, Princeton University.