Politicians love to say they “won’t touch” Social Security, as if leaving the program alone will protect older adults. In reality, a new study by two of my Urban Institute colleagues finds that failing to fix the program’s looming financial shortfall would throw 3.8 million seniors into poverty by 2045. Median promised benefits would decline by $5,900 (in 2022 dollars).
The study, by Richard Johnson and Karen Smith, found that ignoring Social Security’s coming deficit would hurt low-income seniors the most. Doing nothing would slash median incomes of the lowest-income 40% of households by nearly one-fifth. By contrast, the highest income 20% of households would lose about 5% of their income after age 62.
Because most seniors use their Social Security benefits to pay their ever-increasing Medicare premiums, a cut in retirement benefits of this magnitude would leave many low-income older adults without the resources they need to pay other ordinary living expenses, such as food and shelter.
Demographic Time Bomb
Johnson and Smith assume Social Security would address its funding gap by reducing benefits by an equal percentage across-the-board. Allocating its remaining dollars differently would result in different outcomes, though it is not clear how the program would respond to a shortage of needed funds.
Social Security’s actuaries currently project the program’s old age trust fund will become insolvent by 2035, when it will be able to pay only about 83% of promised benefits. Eventually, it will only have sufficient resources to pay about 73% of promised benefits.
The actual insolvency date changes slightly from year to year, depending on economic conditions. But the root cause is a demographic time-bomb: There are too few workers contributing payroll taxes to support current retirees. And as more Baby Boomers claim Social Security for more years, and the ratio of workers to retirees worsens, the problem will only get more severe. And the Social Security system will no longer have the money to pay the benefits it promised older adults.
Solutions But No Will
The solutions are easy to define. But, due to an absence of political will, currently impossible to address. The program’s insolvency can be prevented only by raising taxes, cutting benefits, or some combination of both.
Congress could change the current law and use general funds to pay Social Security benefits. But that would require the government to borrow more money, cut other programs, or raise other taxes.
There are many ways to reform Social Security to close the funding gap.
Congress could raise taxes by, for example, increasing the payroll tax cap which currently is $168,600. There is no cap for Medicare payroll taxes. Or it could expand the tax base beyond wages to include investment income.
Another solution is to adjust benefits. Congress could raise the retirement age. Or it could broadly restructure benefits to provide additional support for the retirement of lower-wage workers while trimming benefits for high-income seniors.
Will Something Turn Up?
The program’s shortfall surprises no one. It has been expected for decades. Yet, politicians mostly look the other way, pretending, like Charles Dickens’s incurably optimistic Mr. Micawber, that “something will turn up.” Micawber, by the way, landed in debtors’ prison.
Former President Donald Trump often promises to leave Social Security untouched. The 2024 Republican Party platform, orchestrated by Trump, says this, in all capital letters: FIGHT FOR AND PROTECT SOCIAL SECURITY AND MEDICARE WITH NO CUTS, INCLUDING NO CHANGES TO THE RETIREMENT AGE.
Congressional Republicans who have proposed changes to the system have been silenced by Trump.
In his 2020 presidential campaign, Joe Biden proposed modest changes, including a restructuring of the payroll tax, that could have extended solvency of Social Security by about five years. But he never pursued the plan while in the White House.
Vice president Kamala Harris, the presumptive Democratic nominee to replace Biden, has not yet said how she’d address the problem.
Johnson and Smith have quantified what all Social Security analysts and many policymakers already know: Doing nothing about Social Security’s financial problems would be catastrophic for many low-income older adults who depend on the program to pay for basics such as food, medical care, and shelter. Despite what the pols claim, doing nothing isn’t an option.