The Social Security trustees released their annual report early in May, warning for the second year in a row that the main trust fund used to support the payment of retirement benefits will run dry in 2033.
Collectively, the funds for both retirement benefits and disability payments are set to become depleted and unable to pay scheduled benefits in full on a timely basis two years later, in 2035. At that time, the trustees warn, tax revenue used to fund both programs is expected to cover only 83% of scheduled benefits. So, unless Congress acts before then, sizable benefit cuts are coming.
Adding to the concern is a new analysis published by Alicia Munnell, the director of the Center for Retirement Research at Boston College. Munnell's review of the 2024 trustees' report shows in no uncertain terms that time is quickly running out for federal lawmakers to right the ship — especially if they wish to equitably distribute the "pain."
"Further delay has real costs," Munnell warns. "Options like investing part of the trust fund in equities are disappearing as the trust fund slides towards zero."
Another big downside of delaying the fix: The burden of tax increases or benefit cuts fully shifts to millennials and subsequent generations. Ultimately, waiting guarantees what is still an avoidable crisis, Munnell argues, and any fix should include automatic adjustments to restore balance, "so we never get in this mess again."
Why We Need 'Sustainable Solvency'
As Munnell points out, the trustees' calculation for the combined retirement and disability program shows that Social Security's long-run deficit is projected to equal 3.50% of covered payroll earnings.
"That figure means that if payroll taxes were raised immediately by 3.50 percentage points — 1.75 percentage points each for the employee and the employer — the government could pay scheduled benefits through 2098, with a one-year reserve at the end," Munnell explains.
This sounds like a relatively simple (if painful) "fix," but the actual outlook is a little more complex. That is, at this point, solving the 75-year funding gap is not the end of the story in terms of required tax increases.
"In the future, once the ratio of retirees to workers stabilizes and costs remain relatively constant as a percentage of payroll, any solution that solves the problem for 75 years will more or less solve the problem permanently," Munnell explains. "But, during this period of transition, any package of policy changes that restores balance only for the next 75 years will show a deficit in the following year as the projection period picks up a year with a large negative balance. Thus, eliminating the 75-year shortfall should be viewed as the first step toward 'sustainable solvency.'"
Citing some positive findings in the 2024 trustees report, Munnell points out that this 3.50% of taxable payroll figure in the new report is actually slightly lower than the 3.61% in last year's update. This shift is primarily a result of changes in three assumptions, she notes, including a stronger-than-expected economy, a seemingly durable drop in disability incidence and expectations for marginally improved fertility rates.
"Some commentators cite Social Security's financial shortfall over the next 75 years in terms of dollars — $22.6 trillion," Munnell writes. "Although this number appears very large, the economy — and, therefore, taxable payrolls — will also be growing. Thus, the scary $22.6 trillion can be eliminated — and a one-year reserve created — simply by raising the payroll tax by 3.5 percentage points."
Other Options to Save Social Security
Of course, apart from immediately and permanently increasing payroll taxes, there are other potential paths forward, and Munnell's analysis examines a number of them — including some that are quickly losing their punching power with every month and year of delay.
"Failure to act has serious implications," Munnell warns. "It undermines Americans' confidence in the backbone of our retirement system and causes some to claim their benefits early, hoping that those on the rolls may be spared future cuts. Equally important, delaying action means that some options disappear, the eventual changes must be more abrupt, and fewer of the current adult generations participate in the fix."
One disappearing option is the chance to invest a portion of trust fund reserves in equities, Munnell says, noting this is an idea that appears to have considerable support.
