Without reforms, Social Security will not to be able to pay full benefits to most current beneficiaries, let alone today’s workers and future generations.

Committee for a Responsible Federal Budget

Introduction

Social Security is backed by the U.S. government and provides inflation-adjusted, monthly income to retirement beneficiaries for life. It is a cornerstone of retirement income, as approximately 90 percent of all retirees in the U.S. will be eligible for the benefit.

The impact of Social Security on American society cannot be overstated. It has played a vital role in reducing poverty rates among the elderly, providing financial security for retirees, and offering assistance to individuals with disabilities and their families. It has become an essential component of retirement planning for millions of Americans, providing a reliable source of income during their golden years.

Our Predicament

So here’s the scary part: near-retirees are now faced with a Social Security predicament. Social Security is (again) going to face funding shortages in the future without governmental action. Why the predicament? Consider the current factors:

• The number of Baby Boomers nearing retirement is massive and unprecedented, all moving closer and closer to retirement age.
• Those same Baby Boomers will experience longer life spans, meaning longer benefit eligibility.
• Decreasing fertility rates in the U.S. mean that the 3.5-to-4-child typical family has been reduced to a 2-child typical family.

The combination of these factors adds up to fewer workers supporting more retirees. In a “pay-as-you-go” system like Social Security, the current generation of workers pay for the benefit payments to the current beneficiaries. The system is strained and the strain will continue — consider that in 2000 there were 3.9 workers paying for every retired beneficiary, 3.2 in 2020, and an estimated 2.7 in 2030.

Ultimately, the analytics just won’t add up. Worker contributions simply won’t be able to cover beneficiary benefits. On March 31 of this year, the Social Security Trustees released their annual reports on the financial state of the Social Security and Medicare programs over the next 75 years. And it doesn’t look good: The Trustees project the Social Security OASI trust fund reserves will be depleted by 2033, which means that one of the Social Security trust funds is within a decade of insolvency.

According to the Committee for a Responsible Federal Budget, “without reforms, Social Security will not to be able to pay full benefits to most current beneficiaries, let alone today’s workers and future generations” (see Figure 1):

Difficult Decisions on the Horizon

Facing similar grim analytics in 1983, the Greenspan Commission was formed and recommended to Congress the following changes to Social Security:

• Increase in the full retirement age from 65 to 67
• Increase in the Social Security tax rates
• Addition of taxes on the benefits of the wealthiest individuals

Congress subsequently passed these changes into law. Today, as in 1983, we face a similar need to resolve our current Social Security predicament.

Conclusion

Social Security is not expected to disappear, but reforms similar to those of the 1983 Greenspan Commission are needed to bring the system into continued solvency.

Reforms may likely include smaller cost of living increases, increased payroll taxes, continued gradual raising of full retirement age, further taxation of benefits, means testing, and potentially linking benefit reductions to longevity improvements, among other possibilities.