The Social Security fix no one is talking about

What if the traditional wisdom on how to fix Social Security no longer holds?

The trustees who oversee the program issued their annual financial forecast on Monday, predicting that the combined retirement and disability trust fund reserves will be depleted in 2035 – one year later than forecast last year. The improvement is due to the recent strong economy and wage growth, which has accelerated payroll tax payments that fund the program. Still, in 2035, the program would be insolvent.

That may sound like Social Security will have no money at all to pay benefits in 2035. But what the report really means is that the enormous Social Security trust fund reserves – currently $2.78 trillion – would be depleted, and the program would be bringing in enough cash at that point to pay only 83% of the benefits promised to current and future beneficiaries. That would be the equivalent of a 17% cut in benefits.

A benefit cut of that magnitude is extremely unlikely. It would pose an immediate and severe hardship for retirees and disabled people, and it is difficult to imagine any member of Congress willing to explain such an outcome to constituents.

Traditional wisdom holds that there are just a few ways to solve the problem: We can raise the payroll taxes that fund the program, cut benefits, or do some combination of two.

But the closer we get to insolvency, benefit reductions cannot be implemented in a way that solves the immediate problem. And a revenue solution gets more challenging – at least, if the goal is to meet Social Security’s legal requirement to forecast solvency over a 75-year period. The payroll tax hikes required at the point of insolvency to meet that goal would be so large that they likely would not be politically feasible.

Polling has long indicated that the public supports higher taxes as a way to keep Social Security solvent and maintain benefit levels.

Democrats – including President Joe Biden – support raising taxes on the wealthy to restore solvency. They also propose raising benefits modestly. Republicans in Congress oppose higher taxes, and have supported benefit cuts via higher retirement ages and means-testing. Donald Trump usually says he would not touch Social Security, although he has mentioned possible cuts to benefits and his advisers are considering cuts to payroll taxes. Leaving the program untouched is not a policy solution, since it points to the aforementioned 17% cut in benefits.

If Democrats sweep the U.S. elections in November, a revenue solution is possible, said Nancy Altman, president of Social Security Works, a progressive advocacy group pushing for expansion. “If Democrats run this fall on expanding Social Security and win on that issue, they can push for it and force votes.”

Martin O’Malley, the recently confirmed commissioner of Social Security, is optimistic that a solution will be reached. “I’ve met with a lot of members of Congress, and my sense is that no one is particularly eager to play chicken with a program that’s this important to so many seniors and people with disabilities,” he told me in an interview on Monday.

But if gridlock persists on this issue, Congress might well turn to a different solution to avert insolvency and benefit cuts: an emergency injection of general government revenue.

“If you had asked me 20 years ago, I would have predicted a solvency solution that leaves the current system intact, but I no longer think that will happen,” said Charles Blahous, who served as one of the two public trustees for Social Security and Medicare from 2010 to 2015. A conservative, he now researches retirement security issues at George Mason University. “But barring a political miracle and a lot of leadership, I now think we’re headed toward a general revenue bailout.”

That would be a profound turning point for Social Security, which has always been self-financed. The program is funded primarily by the payroll tax, currently 12.4%, which is split evenly by employees and employers. It is also funded by smaller amounts of revenue from interest earned on trust fund bonds and taxation of benefits.

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HOW THE MATH WORKS

The logic backing the general revenue solution is straightforward. Even if consensus emerged for some amount of benefit reduction close to the insolvency date, the math simply does not work due to the magnitude and timing of the cuts required.

“You couldn’t implement a 25% cut overnight, because it would have a terrible effect on the income of current beneficiaries,” said Paul N. Van de Water, senior fellow at the Center on Budget and Policy Priorities, a progressive think tank. “And phasing in smaller cuts over a longer period of time doesn’t solve the short-term problem.”

Adding general revenue would mean that Social Security – for the first time – would be adding to the nation’s debt burden, since the money would be borrowed. The shift also could put Social Security in the same boat as other federal programs subject to annual congressional appropriations for things like food and housing.

But Van de Water is more sanguine about the implications of using general revenue to fund the program. “Social Security has become sufficiently popular and ingrained over the years that it’s not clear having some non-earmarked financing would diminish the strength and support for the program all that much.”

Unfortunately, this likely game of brinkmanship will only the worries expressed by so many Americans about the future of Social Security. If you are among those worriers, Van de Water has some words of reassurance.

“Despite the uncertainty, it’s very unlikely that Congress would allow full benefits not to be paid for Social Security,” he said. “There may be a lot of angst before a solution is reached, just as we’ve had angst on other budget issues, but it will be solved.”