Social Security’s contribution to the overall fiscal gap over the coming decades is smaller than Medicare’s, as the program’s trustees have again made clear in their annual report. If Social Security contributes so much less to the fiscal gap than Medicare, some people ask, why do we have to talk about reforming Social Security?
It would be a mistake, however, to ignore the pressure that Social Security will put on the federal budget in the future -- and how that problem, if it is not addressed, will steadily grow. The difference between Social Security’s annual income (without interest) and its annual costs would stay close to 1 percent of GDP for decades but grows closer to 1.5 percent later in the 75-year window under the trustees’ “intermediate” assumptions. The longer we wait, the more difficult fixing the problem will become.
Closing the gap on Social Security certainly won’t be fun and will involve sacrifice. We would not want implement immediate changes that would weaken the economic recovery, nor would we want to place undue burdens on current retirees and lower-income workers. But we could begin to develop reform plans now, and there are many reasonable options available that could quickly improve the program’s 75-year outlook. (The Committee for a Responsible Federal Budget just released this nice summary of the Social Security trustees’ report including a very helpful compilation of reform options.)
The trustees’ report does not get into specific policy options to close the gap in Social Security. But the report makes clear that over time the demographic pressures on the program just keep growing, and that closing that gap sooner -- even with a plan that is phased in slowly -- would be easier than closing it later. From the conclusion of the report’s overview:
Over the full 75-year projection period, the actuarial deficit estimated for the combined trust funds is 1.92 percent of taxable payroll—0.08 percentage point smaller than the 2.00 percent deficit projected in last year’s report. Solvency of the combined OASDI Trust Funds for the next 75 years could be restored under the intermediate assumptions if increases were made equivalent to immediately and permanently increasing the Social Security payroll tax from its current level of 12.40 percent (for employees and employers combined) to 14.24 percent. Alternatively, changes could be made that are equivalent to reducing scheduled benefits by about 12.0 percent. Other ways of reducing the deficit include transfers of general revenue or some combination of approaches.
If no substantial action is taken until the combined trust funds become exhausted in 2037, then changes necessary to make Social Security solvent over the next 75 years will be concentrated on fewer years and fewer generations:
For example, payroll taxes could be raised to finance scheduled benefits fully in every year starting in 2037. In this case, the payroll tax would be increased to about 16.1 percent at the point of trust fund exhaustion in 2037 and continue rising generally thereafter, reaching about 16.7 percent in 2084.
Similarly, benefits could be reduced to the level that is payable with scheduled tax rates in each year beginning in 2037. Under this scenario, scheduled benefits would be reduced 22 percent at the point of trust fund exhaustion in 2037, with reductions reaching 25 percent in 2084.
And regarding the argument often made that we can afford to put those reforms off to future generations, well, even if we made the above changes anytime between now and 2037, the trustees’ report explains that we wouldn’t be done -- that there would be plenty more for future generations to worry about once we get to that next place we’re kicking the can to:
Either of these actions would eliminate the shortfall for the 75-year period as a whole by specifically eliminating annual deficits after trust fund exhaustion. Based on the assumption of continued increase in the average age of the population after the 75-year period (due to expected improvement in life expectancy), Social Security’s annual cost will very likely continue to grow faster than scheduled tax revenue after 2084. As a result, ensuring solvency of the system beyond 2084 would likely require further changes beyond those expected to be needed for 2084.
So while Social Security reform isn’t easy, it is possible. And the longer we wait, the more difficult it will become.