How can we make Social Security solvent?

Karen E. Smith

October 16, 2015 - Urban Institute

In the next year, Social Security is expected to run short of funds to pay full promised disability benefits. Unless something is done, available revenue for the combined retirement and disability system will cover only 79 percent of scheduled benefits in 2034, and the share falls over time.

For decades, large long-range deficits have loomed for Social Security, but short-run surpluses have left Congress complacent, unwilling to make the hard choices to fix the system.

The approaching disability shortfall may spark efforts to reform all of Social Security, including the much larger retirement program. Several presidential candidates, including Republican candidate Gov. Chris Christie and Democratic candidate Sen. Bernie Sanders, have put forth serious Social Security reform plans.

Our analysis shows that some of the most popular reform options won’t help much. They will only delay for a few years the day when Social Security can no longer fully pay its promised benefits.

• Modestly raising Social Security’s full retirement age for people born after 1960 cuts future retirement benefits, but extends trust fund reserves by only one year. This option doesn’t generate any savings from people born before 1961, and the savings from younger people don’t kick in until 2022.
• Modestly raising Social Security’s early retirement age—currently 62—has very little impact on solvency. This option forces many people to wait longer for their benefits, but it wouldn’t change lifetime benefits much because Social Security raises monthly benefits for people who delay collecting to offset the reduction in the number of checks they receive. Raising the early retirement age will likely increase employment for those able to work longer, increase poverty rates for those unable to work longer, but do little to help solvency.
• Raising the cap on earnings subject to the Social Security payroll tax improves solvency but doesn’t eliminate the funding gap. Nearly 7 percent of workers have earnings above the wage cap, currently $118,500. Increasing that cap to $150,000 over three years and then tying it to the average growth in wages plus 0.5 percentage points extends the trust fund reserves by only one year. Fully eliminating the cap in 2016 would extend trust fund reserves by 21 years. Raising the earnings cap also raises Social Security benefits for high-wage workers because more of their earnings would be covered by the program, but reduces those workers’ after-tax pre-retirement earnings.
• Reducing cost of living adjustments (COLA) cuts benefits for long-term recipients but extends trust fund reserves by only one year. Trimming the COLA by 0.3 percentage points each year would reduce net income for those ages 62 to 69 by 1.4 percent but by more than 4 percent for those age 85 and older by 2045.
• Increasing the payroll tax rate can significantly improve solvency. A one percentage point increase in the Social Security payroll tax rate—to 13.4 percent, paid half by workers and half by employers—phased in over 10 years beginning in 2016 would extend trust fund reserves by five years. Trust fund reserves would last an additional 10 years if the payroll tax were raised 2 percentage points and at least 53 years if it were raised by 3 percentage points. Payroll tax increases substantially improve solvency because they affect a lot of people and immediately boost trust fund assets that accrue interest over time.

Many Social Security reform proposals combine various program changes, instead of revising only a single rule. We will continue to examine proposals put forth by presidential candidates, showing how each plan would alter the system’s finances and identifying who wins and who loses.