With the clock ticking to remedy Social Security’s financial ills, many experts are pushing Congress to take urgent action, yet there’s little agreement on which medicine might work best.
The points of contention were on display this week at a panel discussion focused on Social Security’s future. Competing proposals involve raising taxes, adjusting benefits, or both to ensure the program is sustainable.
“We’ve wasted a lot of time thus far in solving this problem, and it’s unfortunate that many still do not advocate actual proposals that can pass,” Mark Warshawsky, a senior fellow at the American Enterprise Institute, said during the event hosted Friday by AEI, a conservative-leaning think tank. Some proposals, he said, are calling for unrealistically large tax increases.
Others see a payroll tax increase as a relatively straightforward solution. “We could either raise revenues modestly, as I prefer, or we could cut benefits by about a fifth,” or even more if action is delayed, Monique Morrissey, an economist at the Economic Policy Institute, a left-leaning think tank, said at the AEI event Friday. “In my mind, this isn’t a difficult decision,” she said, because Americans “across the political spectrum oppose benefit cuts and are willing to contribute more” to preserve Social Security.
On track to pay full benefits until 2034
Looking at combined projections for the retirement and disability trust funds, Social Security is on track to pay full scheduled benefits until 2034–one year earlier than reported last year, according to the latest Social Security trustees’ report. At that time, absent Congressional action, ongoing income will be sufficient to pay 80% of scheduled benefits. The retirement and disability trust funds are legally separate entities, but a hypothetical combined trust fund is used to size up the program’s overall health.
Lower expectations for future GDP growth are a primary factor behind the grimmer projections this year, Stephen Goss, Social Security’s chief actuary, said at the AEI event Friday. “We need by 2034 to increase scheduled revenue for this program by about a third, reduce scheduled benefits by about a fourth, or probably more likely some combination of the two,” Goss said. “So let’s all keep talking to our representatives in Congress and make sure we get the job done in plenty of time.”
Social Security provides retirement, survivor or disability benefits to about 67 million people each month, on average. For years, Goss and other experts have urged Congress to act sooner rather than later to shore up the program’s financial position. Delaying reforms would only require more drastic changes to be phased in over shorter periods, experts say. If no action is taken until 2034, for example, the tax increases or benefit cuts required to stabilize Social Security’s finances would be 20% larger than if action is taken now, according to the Peter G. Peterson Foundation.
Reform discussions are taking place against the backdrop of political sparring over which party is the staunchest defender of Social Security. President Joe Biden in his State of the Union address in February pushed for a bipartisan commitment to avoid any benefit cuts. “Stand up and show them, we will not cut Social Security, we will not cut Medicare,” he said. If anyone tries to cut the programs, he said, “I’ll stop them. I’ll veto it.”
House Speaker Kevin McCarthy, Republican of California, has also said that Social Security cuts are “off the table.”
Rising income inequality hurting Social Security’s financial stability
Rising income inequality is eroding Social Security’s financial stability, some researchers say. Only earnings up to a certain level–$160,200 in 2023–are subject to the payroll taxes that finance Social Security, and that payroll tax cap is adjusted each year based on changes in a national average wage index.
As top earners’ wage growth outpaces average wage increases, a growing share of total earnings exceeds the taxable cap. In 2021, just 81.4% of total wage earnings was subject to Social Security taxes, down from 90% in the early 1980s and the lowest level in nearly 50 years, according to a recent report by the Economic Policy Institute. Each 1 percentage point drop in the share of earnings subject to the payroll tax cuts the program’s revenues by $12.6 billion, the report said.
Some lawmakers are looking at ways to raise the share of earnings subject to the payroll tax. A bill introduced in February by Sen. Bernie Sanders, Independent of Vermont, and Sen. Elizabeth Warren, Democrat of Massachusetts, would subject all income above $250,000 to the Social Security payroll tax while also increasing benefits by $2,400 a year. Social Security’s analysis of the bill said that it would allow the combined retirement and disability program to pay full scheduled benefits on time throughout its 75-year projection period.
The bill, called the Social Security Expansion Act, is an example of how Social Security’s problems can be addressed “without unduly burdening anyone,” Nancy Altman, president of advocacy group Social Security Works, said at the AEI event Friday. Congress hasn’t acted to address the issue in the last few decades, she said, “because until recently they’ve sought to enact what the American people absolutely do not want–benefit cuts.” Now that’s changing, she said, and “I believe real progress will be made.”
Add Comment