Forget about a six-year timetable to reform and save Social Security before its 2032 insolvency. The clock to direct the reform is closer to one year for Republicans or three years for Democrats. Sustainable reform is of greatest consequence for both the program and America’s future prosperity.
Politics makes the timetable real: True reform is impossible during an election year, leaving just 2027, 2029, and maybe 2031 for reform. Bipartisan support is necessary to pass reform, but to direct it, a party must hold the White House and, ideally, Congress. Should Republicans hold Congress this fall, 2027 could be their last shot at directing reform. If Democrats win the White House in 2028, their last chance to direct reform may be 2029. All bets are off in 2031 when pressure builds for a deficit-financed emergency patch.
This long-anticipated moment arrives due to the exhaustion of the Old-Age and Survivors Insurance Trust Fund, projected by the Congressional Budget Office to be depleted in 2032. When this happens, Social Security benefits can only be paid from current Social Security taxes. Taxes will fund only about 72% of benefits. This percentage will change year to year, but after 2032, a 28% across-the-board benefit cut will occur absent a fix.
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Yet no member of Congress from either party will allow this. Congress will pass a last-minute emergency funding measure that does nothing to make the program solvent. This emergency bill — initially about a half-trillion dollars per year — will be minimally offset and deficit financed. This will be repeated annually. Like the COVID-19 bills of 2020 and 2021, it will cause inflation and erode Americans’ savings. The younger generation will be forced to transfer their income to older Americans.
So, if the outcome is a fait accompli with a deficit-financed measure for 2032, is there even a fool’s hope for achieving bipartisan trade-offs to reform this program sustainably?
Social Security today is not the New Deal safety net program designed by President Franklin Delano Roosevelt, which was meant for older, impoverished Americans. Originally, benefits could not be claimed before age 65, and in 1932, life expectancy was around age 62. Today, benefits can be claimed as early as age 62, and life expectancy is around age 79. Further, demographics have changed. In 1945, there were about 42 workers for every Social Security beneficiary; today, there are about 2.7 workers per beneficiary — not enough to fund benefits for everyone sustainably.
Presently, 6.2% of workers’ wages are directly taxed to fund Social Security, and another 6.2% tax is paid by employers on their employees’ wages, meaning a 12.4% tax on wages. Hiking this tax makes life harder for workers by reducing their take-home pay and the number of jobs, as employers turn to more automation and artificial intelligence in response to higher taxes.
Another reform idea would remove the Social Security earnings limit to tax all labor wages without limit, but this would only buy a few years of solvency, would not fix the program’s underlying problems, and could have negative revenue effects.
Next, increasing the age at which benefits can be claimed presents political and practical problems: Politically, those nearing age 62, when benefits can be claimed, will be upset if Congress “moves the goalpost” and raises the age. Practically, is it fair to uniformly increase the age limit when, for instance, life expectancy for African American males is in the low 70s, and life expectancy for White females is in their 80s?
Another option is personalized retirement accounts, with which the public has grown more comfortable, and may yet be poised for greater popularity as Americans enroll their children in Trump Accounts during the current tax filing season. Such accounts have real assets that can be transferred to loved ones, unlike Social Security transfer payments, addressing the inequities of the life-expectancy gap.
What if the system were reformed to be means-tested to ensure that no one would be left destitute, and in exchange for forgoing future Social Security income — into which they have paid during their working life — taxes were lowered on capital gains, dividends, and interest income? What if the age for benefit eligibility were tied to one’s primary occupation and its normal life expectancy? What if we raised the income cap and gave workers the option to opt out of the program and into something such as the newly created Trump accounts funded by a portion of their Social Security taxes, which would then grow with the economy, and could be passed along should one die before one’s natural time?
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We will all find some of these “what ifs” inspiring and others concerning, but there is enough material present for both sides to emerge happy from a reform. The question is whether sufficient trust exists to get the job done amid a sharply divided public and its elected representatives.
Reforming Social Security would do much good for our future prosperity and ensuring a basic level of comfort for America’s older population. Reform done well would inspire confidence in the economy, boosting productivity and growth while reducing the risk premium and interest on America’s gargantuan debt. The clock is ticking. The time to act is now.
Doug Branch spent a quarter century working in Congress and is a senior fellow at the Fiscal Lab on Capitol Hill, a nonprofit, nonpartisan laboratory that helps Congress understand and improve its legislative proposals through its convention and dynamic (economic) cost estimate models.