Today, the Congressional Budget Office (CBO) released its Social Security Policy Options report, which highlights some of the proposals made by policymakers and legislators to restore the Social Security program to long-term sustainability.
Social Security, which provides living assistance to retired workers and those with disabilities, is in need of immediate reform. Social Security ran its first deficits since 1983 this year, and though economic recovery is expected to raise revenues higher than outlays once again for a few years, the program will be running permanent deficits from 2016 on. At that point, the government’s ability to pay promised benefits will depend on the Social Security Trust Fund, which will be exhausted in 2037. This, however, assumes that the funds in the trust fund are actually there—which they aren’t. Congress spent the money that was supposed to be saved and replaced it with government bonds that can be repaid only when the government collects still more taxes.
So what can we do to fix this dilemma? CBO lays out several possibilities, though their list is by no means exhaustive. To keep Social Security’s benefits promises the same as they are now would require an increase in the Social Security payroll tax or raising or eliminating the maximum on the amount of income which can be taxed. Unfortunately, simply raising taxes, even just for the “wealthy,” will not solve the long-term problems, since for now, the tax hikes would collect more than Social Security needs to pay today’s benefits, and the extra money would go to buy more government bonds (while Congress spends the extra money) that will eventually need to be paid by collecting still more taxes in the future. And this “solution” does not even take into consideration the economic effects of such a decision. However, if Congress fails to act and allows the Social Security situation to become dire, tax hikes will be the only available option, since that is the only possible change that can be enacted immediately. Any changes to benefit structure must be planned for well in advance to give those who expected the current benefit time adequate time to adjust.
Possible changes to the benefit structure of Social Security include reducing initial benefits, increasing benefits for low earners, and raising the eligibility age. The last of these should be part of any reform package, as Americans are living longer now than they ever have before. In addition, any changes to the benefit structure of Social Security should focus benefits more heavily on those who need them the most. Lastly, reforming Social Security is important, but of equal importance is the need to address the entire retirement savings system at large in order to allow Americans to better prepare for retirement on their own.