Will Social Security go bust?
Bottom line The Social Security Trust Fund will be depleted in 2034, according to the federal government’s latest report in June, at which point the program will be forced to dip into its $3 trillion reserve to cover benefits. This is three years sooner than expected, and unless Congress takes action to fix the problem, the 61.5 million people who are currently receiving retirement or disability benefits from Social Security will suffer a 21% cut in payments. With approximately 10,000 baby boomers turning 65 every day, this problem will get exponentially worse in the years to come as more and more people are relying on Social Security to live a comfortable life after retirement.
The Greenspan Commission in 1983 passed legislation to fix a similar problem, which it resolved through a series of tax increases and benefit reductions. But President Trump campaigned on no big changes to Social Security, refusing to extend retirement ages, reduce benefit payments or introduce means testing for wealthier Americans.
To complicate matters, House Speaker Paul Ryan announced in April he was retiring at the end of his term. Ryan has been the most serious advocate in Congress for changes to save Social Security over the course of his legislative career, such as his “Better Way” plan in 2016. Unfortunately, he’ll end his term with no substantial progress on reforming the program, so many are wondering what this means for the future of Social Security.
Congress has never been more polarized, and with few lawmakers itching to touch the so-called “Third Rail” of politics, the prospects for an effective bipartisan overhaul in the foreseeable future are dim. Both Republicans and Democrats strongly believe in saving the program, of course, but they have very different approaches. Republicans want to gradually raise the full retirement age, while Democrats want to increase or eliminate the maximum taxable earnings cap. In our view, they’re both right, and that the eventual solution will be multifaceted and involve shared sacrifice.
Demographics are the problem When Franklin D. Roosevelt started the Social Security program in 1935, the life expectancy at birth for the average male was 62 years, which means most didn’t live long enough to collect their full retirement benefits at age 65. That established a flush worker-to-retiree ratio of 42 to 1. But due to advances in health care, medicine, diet, exercise and nutrition, life expectancy has increased dramatically over the past 80 years. Men are now living to an average of 76.1 years and women to 81.1, and are relying on Social Security benefits far longer. According to a Congressional Budget Office report, the number of people aged 65 or older will increase 39% by 2027, while the number of people aged 20 to 64 will only increase 3% over the same period of time. So the worker-to-retiree ratio has already plunged to 2.8 to 1 and is expected to hit 2 to 1 by 2030.
Ryan’s “Better Way” Plan Ryan envisions three feasible options to pay for full Social Security benefits in the future: cut government spending, raise taxes or borrow more money to finance the payments. Whichever options we choose, we need to find a solution, according to former Federal Reserve Chair Alan Greenspan, whose Greenspan Commission fixed this problem once before. He believes entitlement spending is largely responsible for the productivity stagnation in the U.S. since 2009 because it crowds out private savings and investment.
Our two most recent presidents tried but failed at offering partial solutions. In 2005, George W. Bush proposed allowing younger workers to divert a portion of their Social Security payroll taxes into private investment accounts, and Barack Obama proposed fixing the inflation calculation by implementing chained CPI, which is used to calculate annual increases in benefits. The Simpson-Bowles Commission in 2010 was another failed bipartisan attempt to address the issue.
In our view, there are at least seven policy changes that, implemented collectively, could fix the problem with minimal pain and shared sacrifice among all Americans:
- 70 is the new 60 Full retirement benefits are now available at 66 years, increasing gradually until it reaches 67 for those workers born in or after 1960. Last year, 32% of Americans aged 65 to 69 were employed, 10% higher than it was 20 years ago. Even seniors aged 70 and older are putting off retirement. We should continue to increase the retirement age to 70, and index it to increases in future life expectancy.
- Fix the cost-of-living calculation Social Security benefits now rise along with annual increases in the CPI, but many argue this isn’t an accurate reflection on how consumers actually react to rising prices. Switching to the chained CPI is a truer reading of how consumers respond to price increases, and the lower annual increase for inflation would reduce the Social Security deficit.
- Expand private savings options Programs such as the 401(k), IRA and 529 have successfully allowed investors to save for retirement and college expenses. The government should raise the annual caps in these programs or create additional programs to further encourage private wealth creation, allowing more retirees to be self-supporting without government benefits. This could potentially free up some of the Trust Fund assets to be used to support those individuals who rely more heavily on the program.
- Increase or eliminate the wage cap Workers pay into Social Security based on earnings that max out currently at $128,400. Anyone who earns more than that doesn’t pay Social Security payroll taxes based on that amount or have it factored into their retirement benefits. Increasing the current wage cap and indexing it for future growth, or eliminating it altogether, would increase revenues flowing into the Social Security Trust Fund for disbursement.
- Means test benefits The reality is that Warren Buffett, Bill Gates and Jeff Bezos, among others, don’t need a monthly check from Social Security to make ends meet. We should use the tax code to figure out an appropriate level of wealth at which to draw a reasonable line, and index it into the future.
- Fix immigration We’ve discussed this before, but it bears repeating. We need an intelligent immigration reform to increase the flow of young, skilled workers to help grow our economy, supplement a cyclical trough in fertility rates here and keep our borders safe. In the process, these new young foreign workers would be paying into our Social Security Trust Fund.
- Generate higher investment returns Currently the Social Security Trust Fund is invested in Treasury bonds, notes and bills. While they are completely safe, they also generate meager returns that aren’t growing fast enough to compensate the program’s increasing expenses. The government could use a conservative balanced asset allocation mix of Blue Chip stocks and bonds to generate improved investment performance for the Social Security surplus cash on hand.
Research assistance provided by Federated summer intern Audrey Randazzo