The future of the Social Security system: Part seven

The high cost of waiting.

Percent Change Needed to Ensure 75-Year Solvenc. Impossible to avoid insolvency by cutting only new beneficiaries’ benefits. Numbers in parentheses represent percentage point payroll tax increases.Source: CRFB calculations based on Social Security Trustees

Percent Change Needed to Ensure 75-Year Solvenc. Impossible to avoid insolvency by cutting only new beneficiaries’ benefits. Numbers in parentheses represent percentage point payroll tax increases.Source: CRFB calculations based on Social Security Trustees

While the crisis in Social Security will not occur for 20 years, Michigan State University Extension discusses the high cost of waiting to act to reform Social Security.

While the trustees and CBO expect Social Security (on a combined basis) to remain solvent through 2034 and 2029, respectively, both agree on the importance of acting soon. Although 2034 seems to be far off, many of today’s newest retirees would likely still be on the program – turning 81 – and today’s 48 year-olds would be just reaching the normal retirement age. Prompt action is the best way to keep the program solvent for these cohorts. For this reason, the trustees “recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust to them…and allow more generations to share in the needed revenue increases or reductions in scheduled benefits.”

Indeed, as former CBO Director Doug Elmendorf stated in testimony before Congress, “there is certainly a cost to waiting….the longer one waits to make changes, the larger the changes need to be and the more abruptly they would need to take effect.”

For example, based on projections from the trustees, the size of the necessary payroll tax increase to make Social Security solvent would rise from 2.6 percent if enacted today to 3.3 percent if enacted in a decade and 4.0 percent if enacted in 2034. 

The size of the necessary across-the-board benefit cut would grow from 16 percent today to 20 percent in a decade and 23 percent by 2034. If lawmakers exempted existing beneficiaries, that cut would have to equal 20 percent today, 33 percent in a decade, and literally could not be large enough to solve the problem by 2034.

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