Should You Count on Social Security?

These are precisely the same choices the federal budget would face if there were no trust fund in the first place. While the trust fund has legal and political significance, financially it doesn't make it easier to pay benefits.

There is an upside, however: If having a trust fund doesn't make it easier to pay Social Security benefits, not having a trust fund doesn't make it harder.

Think of it this way: In 2033, the year prior to the trust fund becoming insolvent, the federal government will transfer $338 billion (in today's dollars) to Social Security to pay off bonds held in the trust fund. In 2034, the trust fund will run dry and no longer has a legal claim on those transfers of cash. 

But that doesn't mean Congress can't keep on paying. If Congress allowed Social Security benefits to be cut by 22% in 2034, it would also have an additional $338 billion in general revenue sitting around that previously were transferred to Social Security, but would no longer be needed.

Congress could increase spending in other areas, or it could give everyone a big tax cut, or it could reduce the budget deficit. Or, it could keep transferring that money to Social Security.

Congress & the Key Issue

The point is that what matters for the big picture isn't the balance of the trust fund, but the amount of benefits the government is willing and able to pay out at the time the trust fund runs dry. If the federal government can afford to pay the nearly $1.7 trillion in benefits owed in 2034, it can almost certainly come up with a similar amount of money to pay benefits in 2035.

Now, it's unlikely Congress will be quite so transparent about things. From its very founding in the Franklin Roosevelt administration, both Democrats and Republicans have opposed using general tax revenue — in other words, income taxes — to fund Social Security, believing that general revenue funding undercuts Social Security as an "earned benefit" and makes it look like a "welfare program." 

But even that can be worked around. For instance, Congress might increase the maximum salary that is subject to Social Security payroll taxes, which is $142,800 in 2021, but then offset this tax increase by reducing income tax rates for people in that salary range.

It's revenue neutral for the government and tax neutral for taxpayers, but avoids the optics of simply shoveling income tax money into Social Security. 

Congress might take some other steps as well, to make what is effectively a bailout of Social Security look more like a true reform. For instance, both Democrats and Republicans favor increasing benefits for Americans who work long careers at low wages.

Both parties have also worked together to increase opportunities for retirement saving outside of Social Security, most recently in the Secure Act.

Other Possible Reforms

It's easy to imagine further enhancements of private retirement savings being tacked on to a Social Security bill. Or perhaps some long-term, phased-in limitation on benefits for high earners might enter the picture.

Alternatively, a reform plan might increase the taxes that retirees pay on their Social Security benefits, a step that would recoup some of the costs of bailing out the program. 

However, the most prominent reform proposal from congressional Democrats, the Social Security 2100 Act, actually reduces benefit taxation. There just isn't a strong political constituency for reducing payments to older adults, despite their growing affluence relative to working-age households.

None of this is to say that I think this is the best policy, or even particularly good policy. A Social Security program designed for the world of the 1930s would be more expensive and less efficient than one designed for the 2030s and beyond. 

Looking Back, Forward

When Social Security was created there were barely even mutual funds, much less auto-enrollment 401(k) plans holding low-cost target date funds. It's a different world today, and those differences could make for a more targeted but also more effective Social Security plan, if policymakers would be more creative.

For instance, Australia has one of the top-rated retirement systems in the world, while spending less than half as much on retirement benefits as the U.S. The reason: Australia enrolls every worker in a retirement account funded by employers with 10% of employee wages. 

The government funds a means-tested benefit to keep retirees out of poverty, but retirement accounts provide most income on top of that base amount. And as the Australian saving system matures, the government's costs are projected to go down, while in the U.S., Social Security costs will continue to increase. 

Social Security's rising costs are a significant problem, just not a significant problem for most retirees, who are unlikely to experience meaningful benefit cuts. The problem posed by rising Social Security outlays is fewer resources available for everything else the federal government does, or higher taxes that leave less money available to households to support themselves.

There isn't any reason other than political inertia that the federal government must provide tens of thousands of dollars in annual benefits to middle- and high-income retirees who could have easily saved more on their own. But for the time being, that's the most likely outcome. 

Andrew G. Biggs is a senior fellow at the American Enterprise Institute.