Social Security is on the ballot this fall - or, it should be

The Social Security trustees issued their annual report this week on the program’s financial health. They continue to project depletion of the combined retirement and disability trust funds (OASDI) in 2034, although some underlying factors in the numbers continue to worsen.

Think of the trust funds as though they were checking accounts: revenues flow in, and benefit payments flow out. Over the last couple decades, the accounts accumulated large surpluses, but these cushions are now being drained rapidly. Retirement benefit claims are accelerating, and tax revenue is inadequate to keep pace.

If we reach the depletion date, benefits will be cut roughly 17% - most likely across the board. That would happen because Social Security has no legal authority to borrow money to make up shortfalls. Nothing has been done to address the problem, so it now falls squarely on the next Congress and presidential administration.

None of this is to say that Social Security would stop paying benefits. But a benefit cut of that magnitude would be devastating for people who rely on Social Security for most - or all - of their income.

Although the depletion date forecast didn’t change, some of the underlying factors described in the trustee report are troubling.

• The long-range assumptions about the size of the U.S. population were impacted by lower projections on the number of children women will have (down from 1.90 children per woman to 1.75) and a lower number of “unlawfully present” immigrants in the country due to the Trump administration’s crackdown.

• Trump’s “One Big Beautiful Bill Act” made changes to future income tax rates and standard deductions that reduced revenue to the trust fund.

Taken together, these factors produced a big hit on Social Security’s “actuarial balance,” - a figure that reflects the size of the increase in payroll taxes that would be required to make the program solvent for 75 years. Last year, the balance was 3.82%, but that figure jumped this year to 4.42%. That’s a huge change.

Voters should be asking candidates for Congress this year - and for the White House after that - what they plan to do about this problem. Politicians love to promise that they “won’t touch Social Security,” but that answer implicitly endorses the 20% across-the-board cut. In other words, doing nothing is, in fact, doing something quite significant to Social Security. That’s because program has no legal authority to borrow money to close the gap.

Trump has abandoned his party’s long-standing position that trust fund depletion should be solved through benefit cuts - and the deadline is so close now that cuts wouldn’t address the short-term problem, anyway. That doesn’t mean Republicans have abandoned the dream. Just this week, House Speaker Mike Johnson said this in an interview:

“The reason we are in trouble is because over 74 percent of federal spending is on autopilot, mandatory spending,” Johnson told a Louisiana radio station. “That’s your entitlement programs like Medicare, Medicaid and then things like Social Security. They have to be adjusted and fixed.”

Democrats have repeatedly proposed raising taxes by lifting or eliminating the cap on wages subject to the payroll tax ($184,500 this year). That would help address rising income inequality - when Social Security was last reformed in 1983, 90% of the country’s wage base was taxed, but that has now fallen to just 83%, because a larger share of income is going to the top 10%. Discussing the 1983 reforms, Robert Reich notes:

The Greenspan commission assumed that, as the cap rose with inflation, the Social Security payroll tax would continue to hit 90 percent of total income.

Today, though, the Social Security payroll tax hits only about 83 percent of total income in America. It went from 90 percent to 83 percent because a steadily larger portion of the nation’s total income has gone to the top.

In 1983, the richest 1 percent of Americans got 11.6 percent of total income. Today, the top 1 percent takes in more than 20 percent.

This year, someone earning $1 million in wages stopped paying any Social Security payroll tax at the beginning of March. Jeff Bezos probably stopped a few minutes past midnight on January 1. Elon Musk, a few seconds after midnight on January 1. (In point of fact, Bezos, Musk, and other robber barons of this Second Gilded Age get all the cash they need by borrowing against their fortunes, rather than bother with pesky wages, so they probably pay a pittance in Social Security taxes.)

Logically, then, to get back to 90 percent, the ceiling on income subject to the Social Security payroll tax has to be raised.

If all income in excess of $400,000 were subject to the Social Security payroll tax, Social Security’s solvency would be guaranteed forever. We could also expand Social Security benefits.

Other solutions that have been proposed include increasing payroll tax rates gradually over time, taxing returns on investments, or increasing revenues via general fund transfers or new dedicated revenue sources.

“It is a simple math problem, but it’s not a simple political problem,” said Karen Glenn, the Social Security Administration’s chief actuary, during an expert panel discussion hosted this week by the National Academy of Social Insurance. “We need to make choices addressing that shortfall between 2034 and 2100 We need to either raise scheduled revenue by 2034 by about one-third, reduce scheduled benefits by about one-fourth or some combination of the two.” (Watch the briefing below.)

Let’s stay away from talk of “combinations” of tax increases and benefit cuts. The real question is what kind of retirement security we want Social Security to provide.

We are in a situation where most accumulated retirement wealth is concentrated among a relatively small share of households. Many Americans approaching retirement have little or no savings beyond Social Security, and millions already rely on the program for most of their income.

Smart reforms would not simply restore long-term solvency. They would strengthen benefits to help close the retirement income gaps facing low- and middle-income Americans.

One way to pay for that would be to rethink the tax preferences built into 401(k)s and individual retirement accounts. These tax benefits are often described as incentives to save for retirement, but they disproportionately benefit higher-income households that are already most able to save.

The Treasury Department estimates that tax preferences for employer-sponsored retirement plans and IRAs reduced federal revenues by roughly $189 billion in 2020. Research by the Center for Retirement Research at Boston College found that 59% of these tax benefits flowed to the top 20% of earners, while just 3.7% went to the bottom 40%.

We could redirect a portion of these subsidies toward strengthening Social Security, where the benefits would be distributed far more broadly and progressively.

The question is not whether we can afford adequate retirement benefits. The question is what level of economic security we choose to provide in old age.

We’re trending toward a larger Social Security COLA

This week’s inflation report is pointing to a larger cost-of-living adjustment (COLA) for Social Security in 2027.

Inflation jumped for a third straight month, with the Consumer Price Index rising 4.2% in May compared with the year-ago period, driven almost entirely by energy prices stemming from the Trump administration’s war with Iran.

It’s too early to forecast the COLA, which is calculated from third-quarter inflation data, especially since the future course of the war is unknown. But most energy experts say that even if the war ended immediately, energy prices would not fall quickly.

The Senior Citizens League is forecasting a COLA of 3.8%, which would be the largest since 2022, when COVID-era inflation led to a benefit jump of 8.7%. It would be a full percentage point higher than the 2.8% COLA this year.

The COLA always generates intense public interest, since many people think of it as a Social Security “raise.” While a 4% increase might feel good, the COLA really is designed to simply keep retirees even with rising costs - and it is only modestly successful in meeting that goal. Rising health care and food costs, in particular, have eroded living standards for seniors.

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