This year alone, dedicated payroll tax revenue will fall more than $50 billion short of benefits payments; about $170 billion short when we do not count the general revenue transfers to make up for the 2 percent payroll tax holiday currently in law. The problem in front of us is real, and it is dangerous. If we don’t start making some changes, the program as a whole will go bankrupt in 2033, at which point all beneficiaries – young, old, rich, and poor alike – will see their benefits abruptly cut by about a quarter.
If we were to try to bring the program into cash balance immediately by raising the 12.4 percent payroll tax, it would require coupling the expiration of the 2 percent payroll tax holiday with a 1.1 percentage point tax increase next year, a 2.7 percentage increase by 2025, and a 4.1 percentage point increase by 2040.
Over 75-years, the period during which the Trustees measure the “solvency” of the program, Social Security faces an actuarial shortfall of 2.67 percent of payroll, increasing to an annual deficit of 4.5 percent of payroll by the end of the 75-year window. Everyone knows Social Security is in trouble, and everyone knows why. Our leaders in Washington have not made the important changes necessary to keep the system funded as the baby boom population retires and we all enjoy the benefits of higher life expectancy.
Yet those who come forward with solutions are attacked by the special interests in Washington. Propose raising the retirement age by just two years over a 50-year time period and they accuse you of forcing seniors to eat cat food. Ask high-earning workers to pay payroll taxes on a small amount of their income above the $110,100 cap and you are accused of proposing job-killing tax increases. In our combined 48 years in the United States Congress, never did we hear more hyperbole than when we proposed a permanent fix to Social Security.
The goals of Social Security reform are pretty simple – find a way to gradually bring benefits and taxes in line while protecting and strengthening the benefits of those who rely on the program most and rewarding work and savings where possible. And the options are very well known. We can change the retirement age, improve the way we measure inflation, slow the growth of initial benefits for new and higher-earning seniors, raise the payroll tax rate, increase the income subject to the payroll tax, and/or make other modest tax and benefit changes.
We can make any of these changes gradually to give workers time to plan and adjust their savings, and they can be well targeted to ask the most fortunate among us to make the largest sacrifices and ensure each cohort gets at least as large a benefit as the previous one. But we need to start soon because the problem only gets bigger the longer we wait. If we wait much longer, we will not be able to protect current retirees and will have to ask more and more from the middle-class and the economically vulnerable.
Republicans and Democrats can come together on this, as we did, and they must if we hope to preserve this program for the next generation (or in the case of disability, the next decade). We can have a healthy debate on exactly what policies should be in the final fix, but the worst thing we can do would be to wait for the day of reckoning – when trust fund exhaustion leads to an across-the-board 25 percent cut – to act.
It’s time for leaders to lead; and it’s time to reform Social Security once and for all. For ourselves, for our children and for our grandchildren.
Kolbe (R-Ariz.) and Stenholm (D-Texas), both former members of Congress, are on the Board of Directors of the Committee for a Responsible Federal Budget.