In his State of the Union speech, President Obama urged Congress to “act soon to protect future generations.” He was talking about addressing environmental issues. But there’s an easier, more obvious step we can take to improve the lives of our children and grandchildren. We can act now to fix Social Security.
Restoring Social Security to long-run solvency is a straightforward task that would greatly benefit future generations as they plan for retirement.
The problem is simple. Without reform, Social Security is unsustainable. The unsustainability of the program arises from the fact that the ratio of workers to retirees has fallen considerably, and will continue to do so in the future. In 1950, there were 16.5 workers for each Social Security recipient. Today, there are just 2.8. The Social Security trustees project that on current trends, the Social Security trust fund will be exhausted in 2033. At that point, the revenue coming into the system will be sufficient to fund only about 75 percent of benefits.
While there is widespread agreement that something will eventually need to be done about Social Security, some policymakers and economists have expressed the view that this isn’t a pressing matter. After all, the program will remain solvent for another decade, and the economy is currently weak.
But addressing the Social Security shortfall is a pressing matter. That’s because delay increases the size of the bill we pass on to our children and grandchildren, and it generates uncertainty for the next generation as they plan for retirement.
The policy choices boil down to basic arithmetic: to make Social Security solvent, we need to raise the payroll tax rate or cut promised benefits. There are no other options.
The Social Security trustees estimate that we can keep Social Security solvent for the indefinite future if we immediately raise the payroll tax rate by 4.1 percentage points or cut promised benefits for current and future retirees by 23.3 percent.
More likely, we could choose a combination of tax increases and benefit cuts, exempting current retirees and people close to retirement from the cuts. Reform could also include cutting benefits more for high-income individuals than for low-income individuals.
Regardless of which option we choose, the longer we wait, the bigger the tax increase or benefit cut that will be required. Acting now allows us to spread the adjustment burden over more generations.
For example, suppose we decide to close Social Security’s funding shortfall by raising the payroll tax. Taking immediate action will mean that today’s 60-year-old workers will share the burden, paying higher taxes over the remaining years of their careers. But if we wait until 2033, many of today’s 60-year-olds will have retired, exempting them from any payroll tax increase.