A Plan To Fix Social Security

Some hard questions defy easy answers. What is the meaning of life? What happens right at the event horizon of a black hole? How can the US substantially reduce health care spending? But for other questions, the answers are fairly clear, and what is lacking is a willingness to choose. Fixing Social Security falls into this category. As I have argued from time to time in the past, the actuaries at Social Security regularly publish a list of possible tax increases and benefit cuts, and its not hard to put together a package that fixes Social Security. I sometimes say that if we locked a group of 100 randomly chosen people in a room, and said they couldn't leave until they had a two-thirds majority for a plan to fix Social Security, they could be out in time for lunch. 

William G. Gale offers his preferred plan in "How Can We Save Social Security?" which appears in the January 2019 issue of  the Milken Institute Review (pp. 36-51). Gale sketches the history and structure of the program and points out the basic issues. Social Security is financed with payroll taxes. It was going run out of money back in the early 1980s, but a set of reforms at that time combined higher taxes with benefits cuts like a later retirement age and made the system solvent into the 2030s. Part of the reform was to build up surpluses in the Social Security trust fund. But now those past surpluses are being drawn down, and the 2030s are now hovering on the horizon. Gale writes:

"With reserves that accumulated in previous years to supplement annual payroll taxes, Social Security can cover all of the benefits that workers claim through 2034. After that, the reserves will be used up and projected revenues will only cover about three-quarters of the benefits to which workers are legally entitled. Some combination of higher payroll taxes, lower benefits and new revenue sources will be needed to balance the books."

A couple of figures may help to illustrate the underlying problem. The front end of the "baby boom" generation, born from 1946 up through the early 1960s, started hitting retirement age in 2010. Life expectancies are up. From about 1970 to 2010, there were about 30% as many beneficiaries as workers contributing to the system; but by 2030, there will be 45% as many beneficiaries as workers. To put it another way, the ratio of payroll tax contributors to beneficiaries was about 3:1, and it's heading for close to 2:1.

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