Millions of Americans worry about Social Security: whether they will receive the full retirement checks they were promised in the years to come. And many young people believe (incorrectly, in my opinion) that when they are ready to retire, Social Security will no longer be available to them.
The issue is considered so thorny in Washington that most politicians are mulling it over cautiously. The Social Security Trust Funds’ latest annual report in May said that unless action was taken, benefit cuts of about 20 percent would have to begin in 2033.
However, when we stop and really look at the problem, it turns out that what it takes to fix Social Security isn’t much.
This is not a bold statement. It is based on hard figures calculated by Alicia Munnell, a Boston College economics professor who is among the country’s leading social security experts.
A 3.5 percentage point increase in the Social Security payroll tax from 12.4 percent (half paid by employers and half paid by employees) is all that is needed to keep the flow full of Social Security benefits in the 2030s and beyond, Professor Munnell explained in a telephone conversation.
He also emphasized that even if Congress did nothing at all to fix Social Security, you would still receive most of the benefits promised. That’s because most of the money that funds Social Security checks comes from the payroll taxes that workers regularly pay. The system’s declining trust fund income supplements this. Enough tax money will come into the system to pay about 80 percent of benefits, even if trust funds are reduced to zero. But Professor Munnell doesn’t expect that to happen.
Why a solution will come, eventually
Benefits are not likely to be cut for people who are already retired (or about to be) because seniors vote in large numbers. Taking away the money they have been promised would be political dynamite, as President Ronald Reagan discovered in the 1980s, when his administration favored such a move, only to quickly reverse it.
At some point, the political class will find a way to avoid that calamity. Millions of people already feel anxiety and confusion about retirement. It would be much better for everyone if the repair work was done as soon as possible. Because of shortcomings in the rest of the country’s retirement system, preserving Social Security benefits (not cutting them) is critical to the well-being of current and future retirees, Professor Munnell said.
However, a tax increase for Social Security will never be a popular measure. The presidential candidates don’t even openly discuss it, although both the Biden and Trump campaigns say they are committed to keeping Social Security intact.
In an election year, candidates are not rushing to solve a problem that won’t hurt people financially until the next decade and will involve a tax increase, even if it’s quite small.
“It’s going to be a difficult thing to do because you have to raise people’s taxes before they see anything concrete,” Professor Munnell said. “Their taxes need to be raised so they can get what they already think they should get. That’s why I worry that, politically, in this country we tend to go straight to the abyss and only act after we have reached it. That’s what we did in 1983,” when Social Security last received major reform.
Numbers, big and small
Professor Munnell, 81, has been conducting serious research on Social Security since the 1960s. As undersecretary of the Treasury for policy from 1993 to 1995, she officially covered Social Security. He has directed Boston College’s Center for Retirement Research since its founding 26 years ago and has produced his own lucid annual reports on the state of the Social Security trust funds, shortly after the Social Security trustees issue theirs. .
While immersed in the complexities of Social Security, she takes a common sense approach and offers easy-to-understand answers.
How big of a problem is Social Security’s underfunding? It may look big or small, depending on how you frame the numbers.
If you want to scare people, he said, point to the total estimated size of the gap between costs and revenues over the next 75 years: $22.6 trillion. That’s great!
But the American economy is huge and growing. As a fraction of the entire economy over the next 75 years, the Social Security funding gap is minuscule: just 1.2 percent of gross domestic product.
The crucial factor to consider is the payroll tax, since it provides the majority of Social Security funds. As a fraction of the total amount of money collected through the payroll tax, the funding gap is about 3.5 percent.
That’s why Professor Munnell recommends an additional 3.5 percentage points of payroll tax, which would be paid on top of the 6.2 percent for which both employers and employees are now responsible. (Self-employed people pay the full 12.4 percent tax themselves.)
Raise taxes just that amount without changing anything else, he said, and much of the problem will go away.
Roots of the problem
People of my generation, the baby boomers, are retiring in droves. At the same time, due to a long-term decline in the fertility rate, comparatively few working-age people pay taxes to keep the system fully funded. Immigration has helped bolster the workforce, and much more immigration would solve the problem, but given American policy, it would be unwise to count on it.
These demographic issues were well understood in 1983, during the Reagan administration. That’s when a bipartisan commission headed by Alan Greenspan, the future chairman of the Federal Reserve, devised the rudiments of a legislative package that put the system on firm financial footing for a time.
Congress and the president finally agreed to some key changes. They included raising payroll taxes to their current rate, subtly cutting benefits and creating a surplus in trust funds, the size of which has fluctuated since the founding of Social Security in 1935. The idea was that when the baby boom generation If he retired and more money flowed out of Social Security than he took in each year, the trust funds would make up the difference.
In testimony before Congress last year, Stephen C. Goss, chief actuary of the Social Security Administration, said that in 1983 officials expected the trust funds to last until the mid-2050s. “It was known that for then it would be necessary to take more measures,” he said.
Instead, the day of reckoning will come approximately 20 years earlier.
Two things went wrong, Goss said. The first was the deep recession of 2007-2009, which derailed long-term projections.
Second, and more importantly, income inequality in the United States rose much faster than economists expected. The earnings of the top 6 percent “increased much faster than the overall average,” Goss said. In 1983, the Social Security payroll tax was imposed on 90 percent of the country’s wage income. Now, with taxable wages capped at $168,600, only about 82.5 percent of the country’s wage income is taxable for Social Security, she said. Raising the limit above $300,000 would be necessary to return us to the 90 percent coverage of the Reagan administration.
Raising the cap that way — taxing rich people more and everyone else less — would reduce the 3.5-point tax increase needed to fully fund Social Security to just 2.45 points, the Social Security system estimated. Social.
Many options
Professor Munnell’s solution is simple and direct. He would add an automatic circuit breaker (which could temporarily freeze cost-of-living adjustments or modify taxes or benefits) to prevent the system’s finances from spiraling out of control again.
His proposals make sense to me, although he would take into account rising income inequality, increase the salary cap, and reduce the overall payroll tax increase. That’s not a radical idea. It would be a return to the bipartisan spirit of Social Security reform backed by President Reagan, a famously conservative Republican, along with President Thomas P. (Tip) O’Neill Jr., the Massachusetts Democrat.
There are endless ways to fix the system, and once a serious effort is launched, many will be discussed.
However, profit reduction should be ruled out, Professor Munnell said. Only about half of workers in the United States are covered by any retirement plan other than Social Security. Even for those covered by workplace retirement plans, the overall picture of retirement readiness is not pretty. The financial services industry is more than willing to step in with solutions, but always for a fee.
The reality is that for most people, Social Security is as important now as it was 40 or 50 years ago.
The White House and Congress can wait until the 2030s, when benefit cuts will be imminent and widespread anxiety about retirement will skyrocket.
However, there is no doubt that millions of people would be better off if Social Security was fixed and benefits were secured, and that happened right now.