Social Security could go broke by 2035, but lawmakers have new ideas to fix it
WASHINGTON — There’s nothing like waiting until the last minute — as long as waiting doesn’t make the problem worse.
Therein lies the conundrum facing lawmakers and 2020 presidential candidates when it comes to Social Security, which last year paid out retirement and disability benefits to some 63 million Americans.
Social Security’s moment of truth, when the money runs out to pay full benefits, isn’t until 2035, according to the latest official forecast released Monday.
The main Old-Age and Survivors Insurance Trust Fund would run out of cash a year earlier than that. But the program’s trustees say that if legislation is enacted to raid the far-smaller Disability Insurance fund — which wouldn’t go bust until 2052 under the latest projections — and divert the resources to retirement benefits, it would only buy one extra year.
So once the theoretical combined reserves, which now sit at nearly $2.9 trillion, are depleted in 2035, every current and future beneficiary at that point would be forced to take a 20% haircut from what they’d ordinarily receive.
That 16-year lag is a blessing in some ways for the Trump administration and members of Congress, who aren’t facing much pressure to act now to fix the program’s finances. President Trump has shied away from proposing any benefit changes or tax increases to put Social Security on sounder footing, and it’s not a top-tier issue for either the Democratic leadership in Congress or the myriad 2020 presidential candidates from that side of the aisle.
But the Social Security trustees’ findings are also a curse, since if policymakers wait too long, solutions may involve politically unpalatable options such as current retirees absorbing benefit cuts, or hitting working-age Americans with large and sudden tax increases to avoid such cuts.
According to the Census Bureau, by 2030 all of the baby-boom generation of Americans will have reached retirement age. One out of every 5 U.S. residents will be aged 65 or older at that point.
By the trustees’ reckoning, taking action today to fix the programs’ finances for the next 75 years would require either a 22% increase in the payroll taxes paid by about 176 million workers and their employers; a 20% cut to all scheduled payments for future beneficiaries starting this year; or some combination. Waiting to act until 2035 would require a 29% payroll tax increase, 23% cut to all benefits for current and future beneficiaries, or a mix of options.
The legislative fix favored by most of the 2020 Democratic presidential candidates currently serving in Congress is spearheaded by Sen. Bernie Sanders, I-Vt.
Sanders’ bill, which has a House companion introduced by Rep. Peter A. DeFazio, D-Ore., would increase both benefits and taxes. It would apply the existing 12.4% payroll tax — split equally between workers and employers — to income above $250,000 a year. For 2019, the threshold above which the tax no longer applies is $132,900.
That tax would be paired with a new 6.2% tax on investment income for individuals earning more than $200,000 and couples filing jointly earning more than $250,000. The new taxes would eliminate much of the program’s long-term deficit while paying for benefit increases, including increases in the minimum monthly benefit, a more generous cost-of-living adjustment and extending student benefits up to age 22.
According to Social Security’s actuaries, the Sanders-DeFazio bill would push out the date of trust fund depletion to 2071.
Senate co-sponsors include Sanders’ fellow presidential candidates Kamala Harris of California, Cory Booker of New Jersey and Kirsten Gillibrand of New York. Elizabeth Warren of Massachusetts hadn’t signed on as of Monday, but she and Sanders are founding members of the Senate’s “Expand Social Security Caucus,” formed last September.
A competing bill offered earlier this month, from Sen. Mazie K. Hirono, D-Hawaii, would phase out the current taxable earnings cap over the next seven years while also providing a more generous method of calculating inflationary benefit increases. Rep. Ted Deutch, D-Fla., introduced the House version. Their bill, which is co-sponsored by Gillibrand, would extend Social Security solvency until 2053, according to the program’s actuaries.
The only bill currently before Congress that would restore full solvency to the Social Security program over the long haul is also the one that has the best chance of moving in the current session.
Rep. John B. Larson, D-Conn., has introduced legislation that would boost benefits while exempting more of those benefits from tax and set a new minimum benefit for lower-income retirees while applying the payroll tax above $400,000 in earnings and gradually increasing the tax rate to 14.8% over the next 24 years.
Larson, who chairs the Ways and Means Subcommittee on Social Security, hopes to mark up his bill before the August recess, a spokeswoman said.
While Larson’s bill isn’t expected to advance in the GOP-controlled Senate, simply marking it up in Ways and Means would lay down an important marker to gain traction in the next Congress, should Democrats make electoral gains at both ends of Pennsylvania Avenue.
The measure has 203 House co-sponsors this year, or 86% of the Democratic Caucus — including Ways and Means Chairman Richard E. Neal of Massachusetts — though no Republican support. Sens. Richard Blumenthal, D-Conn., and Chris Van Hollen, D-Md., introduced their chamber’s version of Larson’s bill.
The trustees’ report issued Monday paints a slightly rosier short-term picture than last year’s forecast, showing that over the next six years, more than a million workers eligible for retirement benefits will keep working and put off claiming Social Security.
And a look at the new figures shows that an additional 700,000 people eligible for disability insurance will take a pass, as officials say the booming labor market has enabled more people to discard their disabled status in favor of full-time work.
These are “interesting” developments, but they don’t change the wall that the retirement fund, in particular, is destined to hit without congressional action, said Andrew Biggs, a resident scholar at the American Enterprise Institute, a conservative think tank.
“This isn’t going to change anybody’s views on Social Security,” said Biggs, who testified before Larson’s subcommittee earlier this year.
While more Americans may work longer, the number of retirement fund beneficiaries is still projected to balloon from 53.5 million to 62 million by 2025. “You’ve got a similar long-term trend … with the trust fund running out,” Biggs said.
While disagreeing with Larson’s approach because it includes payroll tax increases, Biggs agrees that it is the one proposal on the board that makes the program solvent for the next 75 years.
“The report underscores why it is so important that Congress take action now to prevent cuts from occurring in 2035, by ensuring Social Security is fully funded and strengthened for today’s seniors and future generations,” Larson said in a statement Monday. He said his bill “makes the trust fund sustainably solvent for the rest of this century and beyond.”
But Rep. Tom Reed, R-N.Y., the ranking member on the Social Security subcommittee, drew a line in the sand on tax increases at a panel hearing earlier this month.
“The mission of the Republicans on this subcommittee is to secure benefits without tax increases,” he said. Reed said payroll tax increases in Larson’s bill would, by 2043, amount to $600 for someone making $50,000 annually.
“(W)e’re asking millennials to bear a higher tax increase in a program that they don’t believe is going to be” there when they retire, Reed said.
Conservatives would address the funding problem not by cutting benefits, but certainly by curtailing benefit growth, Biggs said. Conservatives and liberals don’t differ on wanting to secure benefits for lower-income retirees, but disagree on middle- and upper-income recipients, he said.
Both the Larson and Sanders plans, Biggs said, would raise taxes on middle- and upper-income earners while providing the same groups with greater benefits.
But middle- and upper-income earners are already saving for retirement. “All of this to pay higher benefits to people who really don’t need them,” Biggs said.