Social Security on the Brink of a Crisis, Policymakers Must Reform

Social Security is on the brink of a crisis, and America needs an intervention to keep this program available for generations to come. Mark J. Warshawsky at American Enterprise Institute looks at the Social Security Trustees’ annual Report issued March 31, and as he has argued in the past, the projections used in these reports are still likely too optimistic, both in the short and long-terms, in part because of their assumptions about inflation being lower than it is.

The Committee for a Responsible Federal Budget (CRFB) gives the background on the approaching train wreck:

• Social Security is 11 years from insolvency. Social Security cannot pay full benefits to most current retirees under the law. The Trustees project the Old-Age and Survivors Insurance (OASI) trust fund will deplete its reserves by 2033. Including Social Security Disability Insurance (SSDI), the theoretically combined trust funds will be insolvent by 2034, when today’s 56-year-olds reach the full retirement age and today’s youngest retirees turn 73. Upon insolvency, all beneficiaries will face a 20 percent across-the-board benefit cut.

• Social Security faces large and rising imbalances. Social Security will run cash deficits of $2.8 trillion over the next decade, the equivalent of 2.4 percent of taxable payroll or 0.9 percent of Gross Domestic Product (GDP). Annual deficits will grow to 3.5 percent of payroll (1.3 perce 097. Social Security’s 75-year actuarial imbalance totals 3.6 percent of payroll, which is 1.3 percent of GDP or $23.6 trillion in present value terms.

• Social Security’s finances continue to deteriorate. The recent surge in inflation worsened Social Security’s finances relative to the 2022 report, leading insolvency to occur a year earlier and contributing to a 0.2 percentage points of payroll expansion in the 75-year actuarial shortfall. The shortfall is now almost twice as large, as a share of payroll, as was projected in 2010.

Rep. John Larson’s Social Security 2100 Act, former Rep. Sam Johnson’s Social Security Reform Act of 2016, former Rep. Reid Ribble’s S.O.S. Act of 2016, and the plan from the Bipartisan Policy Center’s Commission on Retirement Security and Personal Savings all have some promising ideas for reforming this program. 

Possible reforms include slowing benefit growth and mean testing for higher-income seniors, increasing the retirement age, and modifying the cost of living adjustments (COLA). 

Currently, seniors across the income scale receive benefits increases tied to average wage growth. Slowing benefit growth for higher-income seniors (say, in the top 10-20 percentile) and adding some income-tied cut-offs and off-ramps would ensure that Social Security is targeted and preserved for the most needy seniors. 

Life expectancy at birth in 1930 was only 58 for men and 62 for women, and the retirement age was 65. Life expectancy in 2021 for males was 73.5 years and for females it was 79.3 years. The full retirement age, also called the “normal retirement age,” was 65 for many years. In 1983, Congress passed a law to gradually raise the age because people are living longer and generally healthier in older age. The law raised the full retirement age beginning with people born in 1938 or later. The retirement age gradually increases by a few months for every birth year, until it reaches 67 for people born in 1960 and later. 

Seniors can start receiving Social Security retirement benefits as early as age 62, however, they are entitled to full benefits only when they reach their full retirement age. If they delay taking their benefits from their full retirement age up to age 70, the benefit amount increases. Increasing the normal retirement age further would improve the solvency of Social Security. One policy suggestion is to differentiate between low-skilled, manual labor that is physically more strenuous than white-collar, office, and sedentary work and allow a younger age for the physically more straining work.

Currently, seniors get annual COLA increases based on the consumer price index (CPI), however, many analysts say this CPI measure overstates the average cost-of-living increases. Indexing COLAs to “Chained CPI,” a modified version of CPI, would save taxpayers and Social Security’s solvency for future beneficiaries. The Congressional Budget Office explains the differences between chained vs. traditional CPI: “The traditional versions of the CPI are based on spending patterns from a point in the past, and so do not fully incorporate the effects of consumers’ substitution between various goods and services when their relative prices change. As a result, those traditional versions of the CPI overstate the amount by which consumers’ well being declines when prices rise and understate the benefit of reductions in prices. Therefore, the traditional versions tend to grow faster than the cost of living does.” Chaining the CPI COLAs will help preserve Social Security.

With only 11 years left to restore solvency to Social Security, it’s disappointing that today’s policymakers on both sides of the aisle keep kicking the can down the road. The more in denial these lawmakers are, the more sudden and harsher the painful adjustments will be. As CRFB notes, acting sooner “leaves more options available, allows for more gradual phase ins, and gives workers time to plan and adjust.”