What We Need to Know to Fix Social Security

When we think of Social Security, the one number to remember is 17%. In just 10 years, with fertility down and life spans up, our Social Security system will not have enough money for all of our benefits. At a projected 17%, the income cuts would affect retirees everywhere.

Fixing Social Security

Because most of us oppose reducing benefits, we need to figure out another “fix” that can reduce, at $1.5 trillion, the largest item in the federal budget:

Some History

Before we select a solution, let’s look back and then, ahead.

Established in 1935, the Social Security Program is “pay-as-you-go.” With “pay-as-you-go,” today’s workers pay taxes that today’s beneficiaries receive. The problem though is a ratio. Heading lower, the worker to beneficiary ratio plunged from a whopping 160 to 1 in 1935 to a tiny 3.7 to 1 in 2020. In addition, according to Brookings, Social Security provides 40% of beneficiaries with at least half of their income while one in seven beneficiaries depend on a monthly Social Security payment for 90% of their income. Although some of us need Social Security income more than others, the program’s designers, almost a century ago, wanted all of us to participate. It was not supposed to be a poverty program. Instead, Social Security is an entitlement for all that satisfy its requisites.

A Fix

As your first choice for “fixing” Social Security, please select one of the following:

• Raise the tax ceiling (currently at $176,100).
• Increase the payroll tax (now 12.4%).
• Tax high earners’ Social Security benefits.
• Increase the retirement age (to rise gradually until 2054 to 70).
• Elevate the number of working years used to calculate benefits.
• Expand the labor force with new policies on legal immigration.

I suspect that your solution depends on your income:

Looking at the numbers, the Brookings Institution suggested a menu of tweaks. You can see that tax increases have the biggest impact:

Our Bottom Line: Tradeoffs

With no ideal answer, the challenge of making Social Security more efficient and solvent requires the numbers and the tradeoffs. As economists, knowing that every decision has an opportunity cost–a sacrificed alternative–the stakes are especially high for Social Security. So, whether it’s raising taxes or closing local offices, we need to know the tradeoffs. Only then can we create the most benefit and the least harm.

My sources and more: Always good for opinion data, Pew Research was the place to start with Social Security sentiment. Next, Brookings is my go-to destination for policy analysis. After that I discovered more at Reuters.