The Social Security deficit

  • 13 June 2018
  • NormanL

A recent report from Social Security Trust Fund's oversight board has some dire news: the system is running a deficit for the first time since 1982, and will continue to do so for at least the next 75 years.

That's pretty bad news and raises the specter that in 16 years or so, benefits may have to be reduced to keep Social Security from going bust. What to do about this problem? One is to raise taxes -- a lot. Another may be to tweak the formula for how benefits are determined, as the Tax Foundation suggests:

All that is needed to curb the out-year deficits is to make the real benefits grow more slowly than average wages. To accomplish that, the benefit formula and earnings histories used to set a worker’s benefits when he or she first retires should be prospectively adjusted annually by the growth of prices, instead of wages (or for the lesser of price or wage increases, to be safe), starting a few years hence. This would gradually reduce the “replacement rates” while letting benefits continue to grow in real terms, but at a slower pace. An added year of increase in the normal retirement age to qualify for full benefits would finish the balancing act. 

Changing the benchmark form wages to prices also has substantial political downsides. While this type of indexing would not cut benefits -- which would be necessary if nothing is done -- they would slow their rise. Again, this is probably not going to be a popular alternative.

But as the Tax Foundation notes:

Fixing the system in a manner that encourages more real saving for retirement, and less reliance on an ever-growing tax-transfer system, would do wonders for economic growth and job creation. It would avoid a jobs-destroying payroll tax hike. It would provide additional domestic saving for increasing the U.S. capital stock, which would boost wages, and would increase interest and dividend income for retirees. “Biting the bullet” would be biting a sweet bit of candy.

Politicians are never ones to bite bullets, particularly when Social Security benefits are at stake. But we have been warned -- make change now, or face even harsher alternatives in the future.