Social Security is ‘Badly Out of Balance’ Per Expert — 3 Potential Solutions
Written by
Vance Cariaga
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During its first 75 years or so, the Social Security system worked well enough by using payroll taxes to fund retirement benefits. That changed when baby boomers began retiring in the early 2010s. Not only were they no longer contributing to Social Security through payroll taxes — they also started collecting benefits, which put the program “badly out of balance,” according to one expert.
That expert is Charles Blahous, Senior Research Strategist at George Mason University’s Mercatus Center. In a recent interview with C-SPAN, Blahous discussed some of the challenges facing the Social Security Administration and how to deal with them.
The main challenge is figuring out what to do when Social Security’s Old Age and Survivors Insurance (OASI) Trust Fund runs out of money. That’s expected to happen around 2033. When it does, the program will be solely funded by payroll taxes, which currently cover only 77% of benefits. Making up that 23% shortfall is priority number one for lawmakers and policy advisors.
Here are three challenges and potential solutions facing Social Security right now.
Not Prepared for Trust Fund Depletion Date
Although 2033 is widely recognized as the year the OASI fund is expected to run out of money, Blahous said “we have to be cautious and not rely too much on that date.” By the time 2033 rolls around, “it is too late to solve the problem.”
Blahous recommends that lawmakers and government officials get started on solutions now that can help soften the blow when the trust fund does run out of money. This means not only coming up with ideas but also putting those ideas into action.
“We certainly cannot afford to wait another presidential term to get the job done,” Blahous said.
Accounting for the Funding Shortfall
Everyone knows how much the shortfall will be in 2033 – 23% of the current funds that pay Social Security benefits. The challenge is figuring out how to make up that 23%. The obvious solution is to cut benefits by about 25% across the board.
But as Blahous told C-SPAN: “Lawmakers will not go onto the floor of Congress tomorrow and enact a law cutting everyone’s benefits by 25%. Anything that we do will be much more gradual.”
Another option is to raise payroll taxes to bring in more revenue. Currently, employees contribute 6.2% of their paychecks to Social Security and employers match that 6.2% for a total of 12.4%. Taxes might have to be raised to 16% or higher to cover the shortfall – something even the “furthest left-leaning lawmakers” would be hesitant to do, Blahous said.
The likely scenario is that there would have to be a combination of cuts, steeper payroll taxes and a higher full retirement age, which is currently 67 years old for most Americans who are still working. Such changes would likely impact younger Americans who are decades away from collecting Social Security.
Dealing with the Cost-of-Living Adjustment
The SSA implements annual cost-of-living adjustments (COLAs) to help beneficiaries deal with inflation, but often these adjustments are inadequate when the cost of essentials such as housing, groceries and healthcare outpace overall inflation.
Social Security advocates have urged lawmakers to change the formula for determining the COLA so it includes items like healthcare and Medicare costs, but so far that hasn’t happened. Another idea is to base the COLA on someone’s income so that lower-income seniors get a higher COLA and high-income seniors get a lower one.
“The cost of your consumption needs is less for you if you are a higher income person,” Blahous said. “You spend less of your income on consumption. You could create a rationale…for saying past a certain point, we will cap the COLA amount.”
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