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Retirement Planning > Social Security > Social Security Funding

A Crash Course in Social Security’s Funding Woes

By John Manganaro

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What You Need to Know

  • Both internal and external reports about the Social Security program show major funding shortfalls.
  • Without changes, benefits could be cut 20% to 30%, or more, for the typical retiree.
  • Proposed solutions include adopting a flat benefit formula or increasing the current payroll tax cap.

The Committee for a Responsible Federal Budget has published a new analysis that compares the Social Security solvency projections of the Congressional Budget Office (CBO) and the Social Security trustees, finding there is substantial disagreement in key aspects of the two organizations’ outlooks.

In addition to comparing the two solvency projections, the CRFB analysis also offers a blueprint for restoring Social Security’s long-term financial health, pointing to a variety of possible tax increases or benefit formula adjustments that could be undertaken, either alone or in concert, to put Social Security on a sounder financial footing.

Ultimately, the CRFB analysis warns that legislative action is sorely needed in the coming years, as the projections of both the CBO and the Social Security trustees firmly agree that benefit cuts are in store given current funding levels. At some point in the early to mid-2030s, benefits could be cut 20% to 30%, or more, for the typical retiree, and time is quickly running out to act.

CBO Projections

As the CRFB report highlights, the CBO projects Social Security will face a shortfall equal to 4.9% of taxable payroll over the next 75 years. This shortfall is equal to 1.7% of GDP over that time.

The CBO’s projections posit that restoring solvency would require the equivalent of reducing projected benefits immediately and permanently by 26% or increasing dedicated taxes by 40%. By 2096, according to the CBO, the cash shortfall will rise to 7.4% of taxable payroll, the equivalent of 2.5% of GDP.

Shortfalls at this level would mean adjustments would need to grow to a 35% reduction of scheduled benefits or a 53% boost in revenues. Also notable is the fact that the CBO projects an earlier insolvency date and a larger shortfall than the Social Security trustees, the CRFB report warns.

Specifically, while the CBO projects insolvency in 2033 for the combined Old-Age and Survivors Insurance and Social Security Disability Insurance trust funds, the trustees project a later depletion in 2035.

Trustee Projections

For the 75-year period in question, the trustees’ funding shortfall projection of 3.4% of taxable payroll is substantially lower than the CBO’s projected 4.9% of taxable payroll. This difference is also reflected in the GDP-denominated shortfall projection, and it is more pronounced by 2096, when CBO’s projected shortfall for the year becomes 7.4% of taxable payroll and 2.5% of GDP.

At that point, the trustees’ shortfall increases to a more modest 4.3% of taxable payroll, or 1.4% of GDP.

As the CRFB report highlights, the trustees project Social Security spending will grow from 14.1% of taxable payroll (5% of GDP) in 2022 to 16.7% of taxable payroll (6% of GDP) by 2040. By comparison, the CBO estimates costs will rise to 17.8% of taxable payroll (6.2% of GDP) in 2040.

According to the CRFB, the differences between the CBO’s projections and those of the trustees are likely driven by differences in demographic and economic assumptions. For example, the trustees project that nominal GDP will be over 40% larger in 2096 than the CBO predicts.

Proposed Solutions

The CRFB report highlights more than 10 potential policy solutions that have been put forward by the Congressional Budget Office to shore up Social Security ahead of the trust fund depletion date.

On the revenue side, for example, the CBO proposes an upward adjustment of the $160,200 taxable wage maximum, closing 20% to 42% percent of the program’s funding gap in 2032, depending on the size of the adjustment. Another revenue-focused solution would be expanding Social Security coverage (and the commensurate wage taxes) to all newly hired state and local government workers.

The CRFB report notes that this second move would close 5% of the 2032 gap, but it wouldn’t do much to address the longer-term funding woes, as benefits would eventually need to be paid to these workers.

On the benefit side, one CBO suggestion is to replace the current dynamic benefit formula with a flat benefit set between 125% and 150% of the poverty line. This change, the CRFB report says, would fully restore 75-year solvency.

Alternatively, solvency could be restored through a combination of other benefit changes, the CRFB report states. Some possible changes include making the existing formula more progressive for the top 30% to 50% of seniors, which could reportedly close 15% to 35% of Social Security’s funding gap.

(Image: Shutterstock)

John Manganaro

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