The Social Security trustees released their annual report Friday, noting significant deterioration in Social Security’s financial well-being.
Here’s what Americans need to know.
Social Security will be broke within a decade. Politicians have no credible plan to fix it. And the longer they wait—choosing to vilify their colleagues instead of working with them—the higher the costs will be for all but the oldest Americans.
According to the trustees, Social Security’s old-age retirement program will run out of money in 2033. That means that anyone who is 57 or younger today won’t receive a single full benefit. And all Social Security beneficiaries—whether 67 or 107—will be subject to 23%, across-the-board benefit cuts in 2033 and beyond.
That will mean a loss of more than $5,000 per year in annual benefits for a typical retiree.
That’s the status quo that any politician who refuses to discuss Social Security reform supports, by default.
The trustees also reported that Social Security’s 75-year unfunded obligations increased by $2 trillion to $22.4 trillion, which means each household’s share of Social Security’s shortfall is now $172,000—a $15,000 increase since last year alone.
A trustees’ summary presentation provided to Hill staff noted a worsening economic outlook contributing to Social Security’s deterioration: “Since the assumptions for last year’s report were set, the trustees have reassessed their expectations for the economy in light of recent developments, including updated data on inflation and output, and have revised down the levels of gross domestic product (GDP) and labor productivity by about [3%] over the projection period.”
According to the trustees, if policymakers acted now, they could prevent insolvency by enacting immediate and permanent 21% benefit cuts or by immediately hiking Social Security taxes by 3.4 percentage points, from 12.4% to 15.8%. That would be an extra $2,400 in taxes every year for the typical household.
The Congressional Budget Office estimates that Social Security’s shortfalls are even larger and would require an immediate 4.9 percentage-point tax hike, from 12.4% to 17.3%, to preserve current benefits. That would be an extra $3,500 in taxes every year for the typical household.
The CBO arguably uses more realistic assumptions on inputs such as fertility rates (which have plummeted since 2008) and interest rates (which surged over the past year).
While Democratic lawmakers have maligned Republicans by claiming they want to “sunset” Social Security or slash benefits, the reality is that neither side has a credible plan to save Social Security.
In 2016, both Democrats and Republicans had plans to save the program. The now-deceased Rep. Sam Johnson’s Social Security Reform Act of 2016 would have made the program solvent through a combination of modernizations and progressive benefit reductions. And Democrats’ widely supported Social Security 2100 Act would have made the program solvent by increasing Social Security taxes on everyone and imposing larger tax hikes on higher earners.
But when President Joe Biden promised not to raise taxes on anyone making under $400,000, Democrats removed the biggest source of new revenue—the tax increase on all earners—and cut off their host of proposed benefit increases after just five years.
Even assuming their disingenuous benefit cuts after five years, the revised Social Security 2100: A Sacred Trust proposal still would not make Social Security solvent.
Another group of Democratic lawmakers has a radical Social Security proposal—the Social Security Expansion Act. That proposal fails the “not raising taxes on people making less than $400,000” test, as tax hikes start at incomes of $200,000 for individuals and $250,000 for married couples, and it also fails the economic literacy test. The combination of new 12.4% taxes on higher-income workers and investors and a new 16.2% tax on small businesses would destroy American jobs, incomes, and innovation.
The Heritage Foundation has a proposal that would save Social Security and help increase all Americans’ incomes before and during retirement. That includes gradually shifting to a universal benefit that would lift more people out of poverty, modernizing the program’s eligibility age, using a more accurate inflation index, eliminating Social Security’s retirement earnings test, and allowing people the option to build wealth that they own and can pass on to their families. (The Daily Signal is the news outlet of The Heritage Foundation.)
Researchers with the Penn Wharton Budget Model analyzed a proposal similar to The Heritage Foundation’s that would do a better job of targeting Social Security benefits, and also analyzed a proposal that would expand Social Security. They found that a better-targeted program would result in an economy in 2043 that is 7.3% larger—the equivalent of $12,500 more in annual household income—compared with that expanded Social Security program.
Despite Social Security’s enormous unfunded obligations and the toxic political rhetoric thrown at lawmakers who dare to acknowledge the program’s shortfalls, it is possible to make Social Security solvent, protect and increase benefits for those who need them most, and allow all workers and families the opportunity to have more income and more control of their own money throughout their lifetimes.
This piece originally appeared in The Daily Signal