The new report does not alter that prognosis. The main trust fund that pays old age pensions and death benefits to a person’s survivors is still expected to run out of cash reserves in 2034. And there is some good news, as declining rates of successful applications for disability insurance means the fund that pays for those benefits is now expected to go broke in 2065. That’s a 13-year increase from last year’s report.
But the overall fiscal outlook remains bleak for our largest entitlement program, and it will almost certainly worsen dramatically over the next few years. Social Security is funded primarily by payroll taxes levied on all earnings up to a certain amount ($132,900 in 2019). Skyrocketing unemployment will surely cause payroll tax receipts to plummet, and a long spell of post-crisis unemployment will further deplete the Social Security trust fund’s assets. That fund was already projected to spend more than its total income from taxes and imputed interest income in 2021. The crisis will likely mean that happens this year instead, shortening the time left until the fund’s reserves are depleted.
Fixing this is theoretically easy. The trustees themselves provide an annual list of potential program changes with estimates as to how each proposal would affect the program’s solvency. Without politics, Social Security’s fiscal future would be secure. It isn’t secure, however, because Congress has so far avoided making the painful trade-offs needed.
Liberals and conservatives have always disagreed on which trade-offs are fair. Liberals prefer increased taxation, preferably on the rich. Sen. Bernie Sanders (I-Vt.), for example, called for levying the 12.4 percent payroll tax on people earning more than $250,000 a year as well as levying other taxes on unearned income. Conservatives prefer decreased spending, mainly by increasing the age at which people can obtain full benefits. Their inability to compromise is why the problem hasn’t been solved thus far.
The pandemic could force that attitude to change. The federal budget deficit could exceed $4 trillion this year, the highest amount ever in dollar terms and the largest share of gross domestic product outside of wartime. A slow recovery would further increase deficits in the years to come as higher social safety net spending and lower taxes impact the bottom line. For years, the deficit has been of little political concern. The new, astronomically high figures could change that. And that could push fixing Social Security to the front of the policy queue.
Policymakers should take to heart the advice from Rahm Emanuel when he served as President Barack Obama’s White House chief of staff: Don’t let a crisis go to waste. Instead of tinkering with the current program, both parties should look to reimagining who should be covered by a 21st-century social safety net.
Social Security was designed in 1935, a time when few people could save for their future and fewer people lived beyond 80. It was also designed when one-earner families were the norm and the average woman had more children in her lifetime than needed to keep the population stable. None of these factors is true today. A modern Social Security system that reflected these factors would solve the fiscal crisis, guarantee comfortable retirements and resolve the chronic financial problems plaguing the programs.
A system like this would make Social Security a genuine insurance program that made up the difference between private savings and a decent retirement income. People who could save for their futures would no longer receive government benefits while those who couldn’t, or couldn’t save enough, would continue to receive help from society.
In the short term, this would mean higher taxes on the upper middle class and the rich, along with smaller benefits for those same people. In the long term, it would mean moving to a system where the government provided a basic support for the poor and working class while allowing those in the upper half or so of the income distribution to provide mainly for themselves. Australia’s current retirement system is intended to do this, and thus offers a model for U.S. policymakers.
Americans of all ages deserve a stable and prosperous financial future. A re-envisioned, 21st-century Social Security system could give seniors the security they need without burdening their grandchildren with mountains of debt.