Social Security Is Running Out of Time and Money

Social Security’s Outlook Is Bleak

In its current form, Social Security is broken. The program’s near-term insolvency will affect nearly every person in America. And while polls show that 87 percent of voters want lawmakers to begin implementing changes to Social Security as soon as possible, lawmakers rarely discuss Social Security reform.¹

According to the Social Security Trustees’ 2024 annual report, the program will be insolvent in just nine years—in 2033.² At that point, the law specifies that Social Security cannot pay out more than it collects from workers’ payroll taxes, which will result in a 21 percent, across-the-board, benefit cut. For the average Social Security beneficiary who receives about $22,000 per year in benefits, that will mean a loss of about $4,600.

The Trustees estimate that preventing benefit cuts would require lawmakers to hike Social Security’s tax rate, immediately, from 12.4 percent to 15.7 percent. The Congressional Budget Office estimates that the rate would need to rise to 17.5 percent to prevent benefit cuts. That would mean an extra $2,500 to $3,800 per year in payroll taxes for a median household.

As a program that started out with a 2 percent tax and which promised to never take more than 6 percent of workers’ paychecks, Social Security has grown significantly beyond its founders’ vision. In fact, Social Security has functionally become the opposite of its intent, which included preventing younger generations from bearing the cost of protecting older generations from poverty. Today, Social Security is entirely an intergenerational transfer program (since 2011, every dollar taken from workers’ paychecks has gone immediately to pay for current retirees’ benefits) that provides the highest benefits to those who are furthest from poverty.

Without congressional action, Social Security’s insolvency is inevitable. Each year that Congress fails to enact reforms causes the program’s shortfalls to grow larger. Since 2010, Social Security’s shortfalls more than tripled from $6.5 trillion, or $55,000 per household, to $22.6 trillion, or $172,000 per household. Continued failure to reform Social Security will result in even greater costs, and younger Americans—who already have the equivalent of a second mortgage in federal debt looming over them—will lose the most.

Over the past eight years, lawmakers introduced four bills to comprehensively reform Social Security: (1) the Social Security 2100 Act of 2019; (2) the Social Security 2100 Act: A Sacred Trust of 2023; (3) the Social Security Expansion Act of 2023; and (4) the Social Security Act of 2016. The first three would expand Social Security while the last one would transition Social Security to a smaller, more targeted program. The latter three were estimated, by the Social Security Chief Actuary, to make the program solvent over the long run.³ The Social Security 2100 Act: A Sacred Trust would not solve Social Security’s shortfalls, and would instead exacerbate them if made permanent.

The Social Security 2100 Act

The original Social Security 2100 Act was introduced in 2019. It would have increased Social Security’s 12.4 percent tax to 14.8 percent for all workers and applied Social Security’s tax to earnings above$400,000 (Social Security’s tax currently applies to earnings up to $168,600). The Social Security 2100 Act also would have increased benefits across the board, with millionaires receiving about three times as much in benefit increases as low-income earners. This proposal would have closed Social Security’s long-run shortfalls. Its tax hikes would have reduced economic growth and personal incomes and made it harder for Americans to afford and save for ordinary expenses.⁴

The Social Security 2100 Act: A Sacred Trust

Introduced most recently in 2023, this second version of the Social Security 2100 Act includes significant modifications to align with President Joe Biden’s pledge to not raise taxes on Americans making less than $400,000.

The Social Security 2100 Act: A Sacred Trust is a dishonest distraction from serious reform proposals. A Sacred Trust fails to make Social Security solvent, and it deceptively imposes 75 years of tax hikes alongside only five years of benefit increases. If those benefit increase were made permanent—as the act’s sponsors surely intend—A Sacred Trust would exacerbate Social Security’s shortfalls by 21 percent and cause the program to become insolvent two years sooner.⁵ Paying for A Sacred Trust’s significantly expanded benefits for more than just five years would require not only tax increases on the wealthy, but also increasing Social Security’s payroll tax rate by about 33 percent for all workers.

The Social Security Expansion Act

Introduced in 2023, the Social Security Expansion Act would significantly expand Social Security’s size and scope. Through $33.8 trillion in tax hikes, the Social Security Expansion Act was estimated to make the program solvent over the next 75 years (though this estimate does not factor in all the economic and fiscal consequences of such tax hikes). Since $33.8 trillion in new revenues is significantly larger than Social Security’s $22.6 trillion shortfall, the Expansion Act would use those additional revenues to significantly expand benefits, including an immediate increase of about $2,700 per year for nearly all beneficiaries—including low-income earners and millionaires.

Among the Expansion Act’s take hikes are a new 16.2 percent “net investment income” surtax on small businesses, applying Social Security taxes to capital gains and dividends for higher earners, and an expansion, and eventual elimination, of Security’s payroll tax cap. The Expansion Act would result in top federal tax rates of between 51.8 percent and
53.2 percent on wages, investments, and small business income, and top combined

federal and state tax rates of between 65.6 percent and 68 percent.⁶ These tax hikes would crowd out the possibility of increasing taxes to pay for the federal government’s regular, non-Social Security shortfalls. As Brian Reidl of the Manhattan Institute pointed out, “even 100% tax rates on million-dollar earners would not come close to balancing the federal budget.”⁷

The Social Security Expansion Act’s tax hikes would distort positive activities and impose significant economic damage. Moreover, by taking more income away from people and promising them higher government benefits, the act would make Americans more dependent on the federal government and more vulnerable to the increasing likelihood of a fiscal crisis.

The Social Security Reform Act of 2016

Most recently introduced in 2016, the Social Security Reform Act would have solved Social Security’s long-run shortfalls primarily by shifting to a more progressive benefit formula and by modernizing other program features. In particular, the Social Security Reform Act would increase benefits for 51 percent of lower-income and middle-income workers and reduce benefits for middle-income and higher-income earners, with the largest reductions applied to the highest earners. The Social Security Reform Act would also gradually increase the normal retirement age to 69 (leaving in place the early retirement age of 62), modernize auxiliary benefits, eliminate taxes on Social Security and Disability Insurance benefits, and eliminate the retirement earnings test, which acts like a 50 percent tax on earnings above about $22,000 for workers who choose to receive early retirement benefits.

This proposal would shift Social Security toward a smaller and better-targeted program that is more consistent with its founders’ intent, which included Social Security’s payroll tax never exceeding 6 percent. Moreover, by not raising taxes and by reducing benefits for middle-income and upper-income earners, this proposal would increase the incentives to work and save, which would increase economic growth and personal incomes.

Fiscal Impacts of Reform

While the original Social Security 2100 Act, the Social Security Expansion Act, and the Social Security Reform Act of 2016 were all estimated, on a static basis, to make the

program solvent over the long run, these three proposals would have drastically different impacts on economic growth, on individual and family incomes, and on personal freedom and opportunity.

Researchers have used the University of Pennsylvania’s Penn Wharton Budget Model to estimate the impact of various Social Security proposals on the economy. They find that, within three decades of enactment the original Social Security 2100 Act—which was estimated to achieve long-run solvency—would reduce GDP by 1.1 percent;⁸ a scaled- down version of the Social Security Expansion Act—with roughly half as much in tax hikes and which would solve only two-thirds of Social Security’s shortfalls—would reduce GDP by 1.0 percent;⁹ and a package of reforms similar to the Social Security Reform Act of 2016—including a more progressive benefit structure, smaller cost-of- living adjustments, and a higher retirement age—would increase GDP by 5.3 percent¹⁰

The difference between a 1.1 percent reduction and a 5.3 percent increase in GDP is an economy that is $1.75 trillion bigger with a smaller Social Security program. For a median household, that is equivalent to having either $800 less or $4,000 more income per year.

There is no way to undo Social Security’s past excesses, but there are ways that Congress can curb the program’s excessive growth and its detrimental impacts by focusing on Social Security’s original purpose and protecting those most in need. A combination of reforms that I recommend—shifting to a universal benefit based on years of work, indexing Social Security’s retirement age to life expectancy, and using the most modern and accurate data in benefit adjustments—would make Social Security solvent and enable a nearly 20 percent payroll tax cut.¹¹

If combined with an optional wealth-building component, Americans would have the opportunity to build retirement savings of their own that would grow over time, and which could be passed on to family members. Social Security reform will not be easy, but straightforward solutions exist. Reforming Social Security sooner rather than later would not only save and strengthen Social Security, but it would also improve the federal government’s unsustainable fiscal outlook. Confronting Social Security’s looming insolvency could also have the added benefit of reducing the United States’ rising interest costs by signaling to creditors that policymakers are capable of enacting meaningful reform before a fiscal crisis ensues.