With only 9 years to figure out how to avoid depletion of the Social Security OASI trust fund before benefits would need to be cut by 21% in 2033, the urgency to implement a “fix” to avoid this potential disaster is building.
The Center for Retirement Research at Boston College recently published a brief by Director Alicia H. Munnell explaining why this well-acknowledged problem needs a fix sooner rather than later, and pointed out some potential solutions that would head off “draconian benefit cuts” in 2033.
Among them?
- Raise Social Security payroll taxes immediately by 3.50%–1.75% each for the employee and the employer—which she says would allow the government to pay scheduled benefits through 2098, with a one-year reserve at the end.
- Invest a portion of the Social Security Old-Age and Survivors Insurance (OASI) trust fund assets in equities—with higher returns relative to safer assets that would mean Social Security would need less in tax increases or benefit cuts to achieve long-term solvency.
More about both of these ideas below, but first a look at the big picture.
As confirmed by the most recent Social Security Trustees Report, the projected depletion date for the Old-Age and Survivors Insurance (OASI) trust fund assets remains at 2033.
Since 2010, when Social Security’s cost rate started to exceed the income rate, the government has been tapping the interest on trust fund assets to cover benefits, Munnell’s brief states. And, in 2021, as taxes and interest fell short of annual benefits, the government started to draw down trust fund assets. These drawdowns will continue until the OASI trust fund is depleted in 2033, absent congressional action.
Munnell adds it is crucial to emphasize that the depletion of the trust fund does not mean that OASI has run out of money. At the time of the depletion, payroll tax revenues keep rolling in and can cover 79% of currently legislated benefits. The brief stresses that fixing Social Security sooner rather than later would keep more options open, distribute the burden more equitably across cohorts, and most importantly, restore confidence in the nation’s major retirement program.
Investing Social Security in equities
Munnell says the option of investing the Social Security OASI trust fund reserves in equities—at last—seems to have considerable support. But the window of opportunity to make this work is closing fast.
The brief states that if Social Security had begun investing 40% of its assets in equities in 1984 or even 1997, the trust fund would not be running out of money today.
She also argues that efficient risk-sharing across a lifecycle requires individuals to bear more financial risk when young and less when old, and since the young have little in the way of financial assets, investing the trust fund in equities is one way to achieve that goal.
But time is of the essence. Munnell points out that investing trust fund assets in equities requires having a meaningful trust fund to begin with. “As noted, Social Security’s trust fund is quickly heading towards zero,” Munnell writes. “If policymakers wait until 2033 to fix the system, recreating a trust fund would require a tax hike to cover both the program’s current costs and to produce an annual surplus to build up reserves.”
Investing a portion of the OASI assets in equities could help cover costs over the next 75 years and beyond, she adds. “But to take advantage of this option, Congress has to act sooner rather than later, before the trust fund hits zero.”
Raising the payroll tax
Munnell cites that Social Security’s long-run deficit is projected to equal 3.50% of covered payroll earnings. That figure means that if payroll taxes were raised immediately by 3.50 percentage points (1.75% each for the employee and employer) the government could pay scheduled benefits through 2098, with a one-year reserve at the end.
In 2024, Social Security reserves equal $2.6 trillion dollars, roughly two and a half times annual costs, the brief notes. “Combining these balances with a 3.5-percentage-point increase in the payroll tax would produce a substantial trust fund over the next decade,” Munnell writes.
In dollars, Social Security’s financial shortfall over the next 75 years is projected at $22.6 trillion. But Munnell notes the “scary” $22.6 trillion can be eliminated thanks to growing taxable payrolls simply by raising the payroll tax by 3.5 percentage points. Currently, employers and employees each pay a tax of 6.2% of wages (12.4% combined). This increase would raise that to 7.95% (15.9% combined).
Obviously, the solution of raising the Social Security payroll tax would be a difficult sell to politicians, businesses and a general public leery of any tax increase.
Delay hurts younger generations
The brief goes on to say that continuing to kick the can down the road has real costs—such as the burden of tax increases or benefit cuts falling disproportionately on younger generations while Boomers and potentially even Gen X largely skate.
Munnell writes that if the change had been made in the early 1990s when a significant long-term shortfall first re-emerged, the Boomers would have shared more of the burden with subsequent generations. “At this point, the youngest Boomer is age 60, so the Boomer cohort will not be affected by any increase in the payroll tax and they are almost certainly protected from any benefits cuts,” she writes. “The only way to extract a contribution from the Boomers would be to make some delay or cut in the annual cost-of-living adjustment to Social Security retirement benefits.”
As for Generation X, the brief notes that if Congress were to fail to act until 2035, the youngest member of Gen X will be 55. “At that point, Gen Xers will contribute almost nothing in terms of additional taxes and will most likely be grandfathered from benefit reductions,” Munnell writes.
The result of the good fortune accorded Boomers and Gen Xers is that Millennials and subsequent generations will have to pay the full cost of fixing Social Security to maintain 75-year solvency through 2098.
“In short, fixing Social Security sooner rather than later would restore confidence in the nation’s major retirement program, give people time to adjust to needed changes, retain a number of options that are fast disappearing, and distribute the burden more equitably across cohorts,” Munnell concludes. “Moreover, to avoid future crises of our making, any financial fix should include an adjustment mechanism that automatically restores balance if policymakers fail to act.”
Read the full CRR brief, “Social Security’s Financial Outlook: The 2024 Update in Perspective,” at this link.
SEE ALSO:
- Americans Want Action to Fix Social Security
- 9 Years Until Social Security Trust Fund Becomes Depleted
- Growing Number of Adults Urge Congress to Address Social Security Insolvency
- Oklahoma Congressman Stumps for Bipartisan Social Security Commission
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
