Can you count on your Social
Security benefits when retirement rolls around?
Most Americans worry about this -
partly due to the nonsense they hear from political opponents of Social
Security and ill-informed media. You will hear that the program is bankrupt,
its reserves are nothing but a bunch of IOUs, or that Social Security is a
All of those claims are false,
but there is one good reason for concern. Social Security faces a long-term
financial imbalance that would force sharp benefit cuts in 2034 unless the
government makes changes. The problem stems from falling fertility rates and
labor force growth - which reduces collection of payroll taxes that fund the
system - and also from the retirement of baby boomers, which increases benefit
Absent reform, Social Security
could continue to pay roughly 75 percent of promised benefits. The cuts would
mean that the typical 65-year-old worker could expect Social Security to
replace 27 percent of pre-retirement income, down from 36 percent today,
according to the Center for Retirement Research at Boston College.
No surprise, then, that only 37
percent of workers are “very or somewhat confident” that Social Security will
be able to maintain current benefit levels in the future, according to survey
research by the Employee Benefit Research Institute (EBRI) - although
confidence is much higher among older workers and retirees.
From a math standpoint, potential
solutions to the problem are straightforward. The cuts can be avoided through
increased revenue, benefit reductions or some combination of the two. But the
politics are another matter.
Republicans are far from holding
a unified position on the issue. For example, U.S. Representative Sam Johnson,
a Texas Republican who chairs the House Ways and Means subcommittee on Social
Security, has proposed legislation containing two significant benefit cuts: gradually
raising full retirement ages to 69 by 2030, and using a less generous annual
cost-of-living adjustment formula known as the chained CPI.
Meanwhile, President Donald Trump
has so far held to his campaign promise of opposing cuts. He has suggested that
economic growth will solve the problem by stimulating wage growth and payroll
tax collections - a position most economists dismiss as unrealistic.
REPUBLICAN ENTHUSIASM LACKING
The last major Republican reform
proposal dates back to the George W. Bush administration, which proposed
shifting the program to personal savings accounts - an idea that aroused
Republican passion but that went down in flames.
“That was an idea that got people
excited, but there hasn’t been much enthusiasm for Social Security reform among
Republicans since then,” said Andrew Biggs, resident scholar at the
conservative American Enterprise Institute. Biggs worked on Social Security
reform as an associate director of the White House National Economic Council.
Meanwhile, Democrats are in no
mood to work with the Trump administration on anything that forces a compromise
on their core values - and they have shifted significantly to the left on
Social Security reform. Representative John Larson has introduced legislation
that would not only restore trust fund balance but expand benefits. That is by
far the best approach, since roughly half of all households have saved less
than $25,000, according to EBRI. Larson’s bill is cosponsored by more than 80
percent of the Democratic House caucus - more than any previous expansion bill.
The bill would increase benefits
by 2 percent across the board, shift to a more generous annual cost-of-living
adjustment that reflects spending by seniors and set a new minimum benefit at
25 percent above the poverty line. It also would cut taxes for millions of
retirees by boosting significantly the threshold for taxation of benefits.
The plan raises revenue by
gradually increasing the payroll tax rates that fund the program. The rate
hikes would begin in 2019, and by 2042, workers and employers would pay 7.4
percent each, instead of the current 6.2 percent.
Larson, a Connecticut Democrat,
also proposes changes to the payroll tax cap for very wealthy beneficiaries.
Currently, payroll tax is collected only on wages up to $127,200; the plan
would start collecting taxes again on wages above $400,000. That exempts more
income than many earlier expansion plans, which either removed the cap entirely
or resumed taxation at $250,000.
The payroll tax cap feature
played an important role in boosting support for expansion legislation,
according to Max Richtman, CEO of the National Committee to Preserve Social Security
and Medicare, a progressive advocacy group that supports the bill. “It brought
many of the more conservative Democratic legislators on board,” he said.
Of course, the Larson bill is
going nowhere in the Republican-controlled Congress, so Social Security reform
will not happen before the 2018 midterm elections at the earliest - and perhaps
much later than that. But that does not mean beneficiaries should worry about
draconian cuts in 2034.
Even if reform is not achieved by
2034, Biggs thinks the problem likely would be solved at the 11th hour through
tax increases - simply because benefit cuts must be enacted and phased in over
long periods to give beneficiaries time to adjust.
"If they were going to do
this by cutting benefits, it should have been enacted 20 years ago," he
said. "If you want to do it by raising taxes you want to wait as long as
possible, so that you get to the point where the only solution is to put more
money into the program.”
But the uncertainty on Social
Security policy will continue to undermine public confidence in the program -
and that is worrying. Meanwhile, the clock is ticking.