While policymakers in Washington, D.C., are focused on increases in infrastructure spending and changes to corporate and capital gains taxes, an arguably even more important issue is receiving absolutely no attention.
Social Security is America’s largest government program and is the most important source of income for most elderly Americans, along with millions of others: individuals with disabilities, widows and children of deceased workers. But if policymakers do not make changes to this program soon, benefits for tens of millions of Americans will be at risk.
The nonpartisan Congressional Budget Office (CBO) recently forecast that Social Security will, for the first time in 40 years, run a deficit this year. And 40 years ago this month, President Reagan sent a letter to Congress asking them to “launch a bipartisan effort to save Social Security.”
He quickly established the bipartisan National Commission on Social Security Reform to address the looming financial crisis facing our nation’s public retirement system. The Commission’s recommendations became the basis for bipartisan legislation that passed two years later.
The 1983 reforms were necessary because Social Security’s “pay-as-you-go” design, in which the payroll taxes paid by current workers were used to provide benefits to current retirees, had run headlong into demographic changes. Longer lives and lower birth rates meant that the ratio of workers paying into the system to those receiving benefits had been steadily declining. As a result, there was a fiscal mismatch that required a rebalancing of taxes and benefits.
Those reforms were substantial, expanding coverage to millions of new workers, raising social security’s payroll tax rate (to its current 12.4 percent) and cutting future benefits by gradually phasing in increases in the age at which retirees could claim full benefits. The program has since built up a trust fund, with total assets of $2.9 trillion (roughly equal to the combined value of Facebook, Google and Tesla).
Those fixes were not enough. Four decades later, we urgently need that same bipartisan cooperation. The ratio of workers to beneficiaries continues to decline and will do so beyond the next decade. That will leave increasing deficits and a rapid decline in Social Security’s trust fund.
CBO projects a Social Security deficit of $120 billion this year that will steadily grow to $384 billion by 2030. Two years later, the trust fund will be fully depleted. If we do not act soon, the Social Security Administration will not have the resources or authority to pay full benefits, leading to an immediate 25 percent benefit cut. Such an outcome would be a crisis for most of the 80 million Americans who will be receiving Social Security in that year.
This information is disturbing, but not surprising. Had we heeded earlier calls by Presidents Clinton, Bush and Obama, we could have phased in tax and benefit changes gradually to minimize the disruption to people’s lives. Instead, Social Security became increasingly polarized and both parties became less honest about the implications. Too many Republicans pinned their hopes on an ill-conceived plan to convert Social Security into a nationwide 401(k) style system. Democrats have been content to minimize the scope of the problem, even calling for benefit increases despite not having a plan to pay for those benefits already promised.
In a world of combatting narratives and alternative facts, it is worth remembering that mathematics does not distort or lie. And the mathematics of Social Security are clear: benefits are at risk. And the longer we wait to face this, the more disruptive those changes will be.
If we wait until the trust fund runs dry, then we will be faced with a mix of ugly choices. We could immediately cut benefits for 80 million recipients by 25 percent. We could raise payroll tax rates for 180 million workers from 12.4 percent to about 16.4 percent. In either case, further spending cuts or tax increases would be required going forward. Neither of these options or the others that could close the funding gap are economically attractive, let alone politically palatable.
If we act soon, we can phase-in changes in a much less disruptive way, while making improvements to the program’s structure and incentives. As two economists who previously served in Republican (Brown) and Democratic (Duggan) administrations, we believe all proposals should be on the table. This includes, but is not limited to, raising the payroll tax rate, increasing the maximum annual earnings upon which those taxes are levied (currently $142,800 annually), enacting further increases in Social Security’s retirement age and reducing the generosity of benefits for those with higher incomes.
Will these changes be politically or economically pleasant? No. But as economist Herb Stein once quipped, “if something cannot go on forever, it will stop.” And the rapidly increasing Social Security deficits that are on the horizon cannot go on forever.
So, the questions for policymakers are: Will it stop abruptly, creating economic hardship for tens of millions of vulnerable Americans? Or will you find the courage to work together to fix it?
As President Reagan said 40 years ago, “for generations of Americans, the future literally rests upon our actions.” And as dysfunctional and fiscally undisciplined as politics in Washington, D.C., may be today, at least we have history on our side to show that action is possible.
Jeffrey R. Brown is dean of the Gies College of Business at the University of Illinois at Urbana-Champaign. Mark Duggan is Trione Director of the Stanford Institute for Economic Policy Research.