The Social Security trustees have estimated the nation’s retirement trust fund will become insolvent in just 6 years, during the term of the next president. If nothing changes, that means recipients would see their promised benefits cut by 22% across the board.
Of course, something will change. Nobody in Congress or the White House wants to take the heat for such an outcome. But that doesn’t mean lawmakers will actually fix the problem.
My bet: Sometime in 2032, just before the wheels come off, Congress will agree to borrow trillions of dollars to patch the hole (if anybody will lend it) and buy time by creating some kind of commission to study the problem.
The amount that needs to be borrowed will be staggering. The fund faces a cumulative shortfall of $3.8 trillion over the next decade, nearly 1% of the entire US economy, and the cash flow deficit grows every year.
Finding A Solution
If we are lucky, a commission will have teeth. And it will find a solution that lawmakers will have no choice but to accept. That’s what happened back in 1983, when a group chaired by Alan Greenspan handed Congress and President Reagan a blueprint for temporarily restoring solvency to the system.
If we are not lucky, the government will just continue to borrow until the bond market finally says, “no mas” and drives interest rates so high that policymakers will have no choice but to fix the structural problem.
The thing is: Everybody knows how to do it. Taxes need to be raised and benefits need to be restructured. Social Security reform options have been sitting out there for decades. Sure, there will be important ideological and political choices to be made but it will be a matter of choosing from a menu of fixes that already is clear.
For example, there is a broad consensus among analysts that higher income retirees should get less than they’ve been promised while lower income retirees should get more. But how much less? And how much more? Lawmakers need to suck it up and decide.
But the political will is missing. And that won’t change until a future president is willing to lead on what inevitably will be a bipartisan reform plan that will make many voters angry.
A Sad History
President Clinton was the last president to even try. In 1997, he quietly sought a “grand bargain” with Hill Republicans to close the system’s financial gap. He planned to follow-up with a more formal ad hoc negotiating group. But just as it was about to meet, the Monica Lewinsky scandal broke. With it, any hope for an agreement collapsed.
Before Clinton, President George W. Bush floated his plan to allow younger workers to voluntarily divert a portion of their payroll taxes into personal investment accounts. But that idea died a quick death on Capitol Hill.
Those initiatives came in the last century. Since then, presidents have not failed to try to fix Social Security’s finances, they have made them worse.
President Obama largely ignored the issue, the default option for politicians of both parties.
President Biden accelerated insolvency by signing a plan to increase Social Security benefits for some retired government employees, while never coming up with a way to pay for it.
And when a few GOP members of Congress stuck their heads out of the foxhole to suggest reforms to the system, Biden shut them down.
President Trump doubled down. Though he regularly promises he won’t touch Social Security, he keeps pushing policies that accelerate its insolvency.
His 2017 tax cuts that Congress extended last summer and last year’s extra $6,000 deduction for seniors all reduced trust fund revenue and worsened its financial condition.
Trump’s aggressive anti-immigration policies have slashed the number of workers who pay into the system but would not collect benefits, draining still more revenue. The Penn Wharton Budget Model estimates undocumented workers paid about $24 billion in Social Security payroll taxes in 2024.
The trustees’ estimate of insolvency in 2032 roughly tracks the projection the Congressional Budget Office made after Congress passed Trump’s big budget bill last July.
Are The Trustees Too Optimistic?
There is some reason to believe matters may even be worse than trustees estimate, both in the long and short term.
In the long run, a continuing decline in US birthrates will mean fewer future workers to support their retired parents and grandparents, as described by Cato’s Romina Boccia here.
And then there is AI. Nobody knows how artificial intelligence will affect labor markets but there is at least some chance the AI disruption will cost jobs, at least in the short run. Fewer workers and lower labor income would mean less Social Security revenue.
Congress is eight months late passing a routine annual budget. In that environment, I wouldn’t count on either Congress or the White House to tackle an issue as politically charged as Social Security, at least not anytime soon.
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