Social Security is the largest expenditure in the federal budget, costing $1.3 trillion annually.
A recent trustees report from The Tax Foundation, a renowned nonprofit organization focused on nonpartisan tax policy analysis, highlighted the Social Security program’s increasingly precarious financial situation, and the report stated that unless significant reforms are implemented soon, the program will significantly worsen the United States’ ongoing debt crisis.
The report, dated September 24, 2024, provides a detailed analysis of the impending financial difficulties that Social Security will face. It predicts that by 2035, the Old-Age, Survivors, and Disability Insurance (OASDI) Trust Fund will be depleted.
At that point, current payroll tax revenues will only be enough to cover approximately 83% of the promised benefits. If no legislative changes are made, all recipients’ benefits will be reduced by 17%.
While the situation appears dire, there is hope that lessons can be learned from previous attempts to reform the system. The history of Social Security reform, while often contentious, provides insight into the types of solutions that may be required to avoid a full-fledged crisis.
Making difficult political decisions will almost certainly be a necessary component of any reform. However, these decisions are required to ensure that future generations of retirees have access to a dependable and sustainable retirement system.
If no action is taken, the financial instability of Social Security may jeopardize its ability to serve as a safety net for millions of Americans.
Looking to other countries can also provide useful guidance on how to deal with these challenges. Many countries have encountered similar challenges with their retirement systems and successfully implemented comprehensive reforms. Countries such as Sweden, Australia, Singapore, and Chile have demonstrated that retirement savings programs can be significantly improved.
Although none of these countries’ systems are without flaws, they all provide practical examples of how governments can encourage private saving while also ensuring the long-term viability of retirement programs.
Takeaways from the Tax Foundation report on the future of Social Security
The Tax Foundation’s report presents several key findings. It acknowledges that previous reform efforts, including the significant 1983 amendments, have failed to address the long-term funding issues that continue to plague Social Security. The changing demographic landscape of the United States is a major contributor to this failure.
The number of workers who contribute to Social Security has steadily declined in comparison to the number of retirees who receive benefits. The worker-to-retiree ratio, which is currently 3-to-1, is expected to fall even further in the coming years. With fewer workers supporting an increasing number of retirees, the financial strain on the system will only grow.
The report proposes several reforms that could improve Social Security’s financial health. One suggestion is to switch from wage to price indexing when calculating benefits. This would slow the rate at which benefits accrue over time, lowering the program’s overall cost.
Another suggestion is to gradually raise the retirement age, which would delay when people become eligible for benefits and help the system keep up with rising life expectancies.
Furthermore, adjusting benefits for inflation using the chained Consumer Price Index (CPI) would reduce the amount of benefit increases, thereby contributing to cost savings.
Finally, raising the payroll tax cap may increase revenue for the program by requiring higher-income individuals to contribute more.
In addition to addressing structural imbalances in the system, the report identifies a larger issue. The current Social Security structure discourages private savings by placing an undue reliance on the federal program.
This not only affects younger workers and newcomers to the workforce, but it also undermines efforts to encourage individual responsibility for retirement planning.
Without strong incentives to save, many people are left with insufficient financial resources when they retire, putting additional strain on the federal system.