The big news for long-term Federal fiscal policy this week came with Monday’s release of the Trustees Report on the Social Security Trust Fund. Based on the media coverage in the days since the report’s release, you could be forgiven for believing that Social Security—the primary income support program for the nation’s elderly—faces a profound fiscal crisis, with the program’s Trust Fund approaching insolvency sooner than expected and the irreversible loss of benefits for future retirees.
Fortunately, the truth about the program’s future is significantly less dire than reported—as long as officials in the White House and Congress make the necessary policy changes to address the challenges that actually face the program. In short, Social Security is not “going broke” now, and can avoid going broke far into the future in one simple step that doesn’t involve cuts to beneficiaries—increase program revenues through lifting the cap on the amount of income subject to the Social Security payroll tax from $100,100 to include all wage income earned by the worker.
First, a brief a primer on Social Security. First created in in 1935 as a social insurance program aimed at ensuring a basic standard of living for the elderly, Social Security functions as a “pay-as-you-go” program, in which today’s workers pay payroll taxes that support benefits for today’s retirees.
For much of the past 30 years, there have been a larger number of workers than retirees, such that the Social Security Trust Fund built up a significant surplus, as more money went into the Trust Fund through payroll taxes than came out in benefits. Every year this surplus is added to the existing balance of the Trust Fund. According to the report, the surplus is projected to be $57.3 billion for 2012 (when combined with the interest income generated by the fund balance) and will continue to grow through the end of the decade, eventually boosting the fund balance from $2.74 trillion this year to a peak of $3.06 trillion in 2020.
In 2021, however, the amount paying out in benefits will begin to exceed the amount coming into the Trust Fund through payroll taxes and interest income, as the program begins drawing down the Trust Fund to pay for Baby Boomers’ retirement. The Trustees expect this imbalance to completely spend down the amount in the Trust Fund by 2033—three years sooner than projected last year due to the sluggish economic recovery.
Although this fiscal imbalance certainly presents a challenge for Federal policy makers, it may be easy to overstate the depth of the problem, especially given the fact that even after 2033, the projected Trust Fund revenue generated by workers’ payroll taxes will continue to flow into the program, enough to pay 75% of expected benefit-levels to every retiree for an additional 30 years. And recent estimates suggest that 75% of benefit-levels in 2033 will still be more worth more in inflation-adjusted dollars than the benefits received by current retirees.
Clearly, benefit cuts are harmful to seniors, negatively impact the economy, and should be avoided. One solution proposed that could extend the life of Social Security’s solvency without cutting benefits involves simply increasing the revenue flowing into the program.
Under current law, workers are subject to the program’s payroll taxes only for their first $110,100 in wage income, and every dollar in income earned after that point isn’t taxed at all for Social Security purposes, creating a regressive system that puts an undue burden on low- and middle-income workers. Doing away with this cap would significantly increase payroll tax revenues into the Social Security Trust Fund and ensure solvency over the very long term, allowing the program to pay recipients’ their full benefits for the next 75 years.
Let’s begin the discussion about solutions that can protect the integrity of the program and its ability to secure retirement for more Americans. Social security is not going broke, but strengthening the fiscal health of the program for the long-term will unquestionably allow people to feel secure in their planning for retirement.