Social Security has funding problems. How do we fix it before benefits are cut?
Social Security has funding problems. How do we fix it before benefits are cut?
Congress just went through a monthslong discussion about the federal government’s liquidity challenges. They were resolved, for now, with a suspension of the debt limit until 2025. The general Treasury, though, is not the only government account with cash-flow problems.
Since 2010, Social Security, a program that 67 million Americans rely on and pays out more than $1 trillion annually, has been running a cash-flow deficit. At the current rate of spending, the trust fund that supplements the income tax in financing Social Security payments will run dry within the next 10 years, dropping payouts by about 23%.
Dennis Jansen, an economics professor at Texas A&M University, wrote about the Social Security shortfall in a piece for The Conversation and joined Marketplace’s Kai Ryssdal to discuss it. The following is an edited transcript of their conversation.
Kai Ryssdal: So for those who either never knew or have forgotten, a quick refresher, please, on how Social Security in this country is funded.
Dennis Jansen: Sure. The main way Social Security is funded is by a tax on wage income. It’s 12.4% total, and it’s split equally between workers and the employers of those workers.
Ryssdal: And you write — and your co-author [Andrew Rettenmaier] write in this piece in The Conversation that I mentioned up in the introduction — that Social Security basically is going to run out of money sooner than we thought. And my question is, how come?
Jansen: Well, Social Security is going to run out of money because the payroll tax is collecting roughly 13% of this taxable income, and we’re spending more than that. The excess Social Security taxes that were collected in the past accumulated in a trust fund. The current law says that when the trust fund is emptied, benefits can only be paid up to the amount of taxes collected. And so, hypothetically, of course, the beneficiaries of Social Security would see a 23% cut in their monthly checks.
Ryssdal: So look, let’s play the hypothetical here. President [Joe] Biden calls you, and he’s got [House Speaker] Kevin McCarthy and [Senate Majority Leader] Chuck Schumer in the Oval Office with him and you’re on speakerphone. And they say, “So look, what should we do?” What do you say?
Jansen: I think there’s a series of plans that would basically close the gap and rescue the financial situation of Social Security. I think you’re going to end up both cutting benefits and raising taxes.
Ryssdal: Wait, sorry, let me just interrupt real quick because I’m obliged to interject here — the Congress of the United States, which really does not enjoy making difficult decisions, like, oh, cutting benefits or raising taxes.
Jansen: I agree completely. But I think the prospect of facing beneficiaries with a 23% or something cut in benefits would focus the attention and the mind.
Ryssdal: So let’s say this hypothetical conversation you have with the president and the leaders of the houses of Congress happens tomorrow. Do we have enough time, do you think, before the trust fund runs dry?
Jansen: Yes, we do. So we could raise the retirement age and basically index it. We index Social Security payments to inflation. We could index the retirement age to longevity. We would increase the retirement age by about one month every two years. Now, you know, whether that’s acceptable or not, I don’t know. But it seems like a fairly reasonable response. And that would close about 20% of the gap.
Ryssdal: Yeah, go ahead, because there’s 80% more to go.
Jansen: Well, so we currently index Social Security payments to the [consumer price index]. If the Social Security benefits were just indexed to the chained CPI — and that’s kind of a technical thing — it would close about 20% of the gap. And it would do it slowly. You’re talking about changing the cost-of-living adjustment by a very small amount each year, but it accumulates over time. The last benefit adjustment, I think it’s to add another bracket to this Social Security benefit formula. So right now, you get a 90% replacement for the first small set of income that you’ve earned, then it goes to 32%. And then it goes to 15%. For those higher income levels, we could have the replacement rate be a lower number than 15%. This would close a third of the gap.
Ryssdal: So the wealthier recipients would receive even less than they do today. Let me ask you one more thing, and then I’ll let you get back to your day job. I think it’s the case that we only pay Social Security payroll taxes on, like, the first $160,000 worth of income, right?
Jansen: That’s right. That’s also indexed, but that’s correct.
Ryssdal: Right. So that goes up year on year, but it does seem to make some sense that maybe increasing that would go some way. Right?
Jansen: Right. I mean, you could raise taxes on all wage income, but there’s been an increase in wages paid at the very top of the wage distribution. There’s some people making $10 million a year. I mean, I don’t know, maybe these are professional athletes, I’m not sure. And if you started taxing that much of the wage income, that would close a fourth of the gap right there. And if you add up those numbers, I think you get basically to 100%.
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