Retirement

Fixing Social Security isn’t hard, and everyone will be better off – the focus of retirement research

The trustees’ report shows a 75-year deficit and trust fund exhaustion in the early 2030s.

gave 2024 Report of the Social Security Trustees Repeats the drumbeat that the Social Security program faces deficits equal to 3.50 percent of payroll over the next 75 years and that its trust fund is set to run out in the early 2030s.

The 75-year deficit is the result of constant tax rates and rising costs. The increase in spending is driven by demographics, particularly the decline in the birth rate after the baby boom period. The combined effects of a slowly growing labor force and the retirement of boomers reduce the ratio of workers to retirees from 3:1 to 2:1 and correspondingly increase spending (see Figure 1).

The 75-year deficit is the difference between the present discounted value of the defined benefits and the present discounted value of future taxes plus the assets in the trust fund. This calculation shows that Social Security’s long-term deficit is estimated to be equal to 3.50 percent of covered payroll income. This figure means that if the payroll tax were immediately raised by 3.50 percentage points – 1.75 percentage points for each employee and employer, the government would increase the benefits for everyone reaching retirement age by 2098. Will be able to pay the current package. End of year reserve.

The 75-year cash flow deficit has been mitigated somewhat by the existence of the trust fund, whose assets currently equal roughly two years’ worth of profits. These assets are the result of cash flow surpluses that began in response to the reforms enacted in 1983. The retirement (OASI) trust fund is expected to expire in 2033. A full 75-year period, so the depletion date of the combined OASDI trust funds is moved back one year to 2035. But combining the two systems would require a change in law. So, the action date under current law is 2033 – nine years from now.

It is important to emphasize that lack of trust fund does not mean that OASI is “insolvent”. In times of recession, payroll tax revenue continues to grow and can currently cover 79 percent of legislative benefits. (If the OASI and DI trust funds were merged, the coverage numbers would rise to 83 percent.) Relying only on current tax revenue means that benefits for both current retirees and future beneficiaries are roughly 20% will be reduced.

The bottom line is that in the 2030s we will either have to bring in more money or cut Social Security benefits. My view is that we should increase revenues and maintain benefits. This theory is based on the sinking state of the rest of our retirement system: 1) Only half of the people in the private sector, at any given time, work for an employer with a retirement plan. And 2) for most of those lucky enough to have a plan, their 401(k)/IRA holdings are modest.

Fixing Social Security is not a big deal. The reduction amounts to only 1 percent of GDP, and the changes required are within the range of volatility of other programs. Doing it sooner rather than later will keep more options open, distribute the burden more evenly across groups, and most importantly, restore confidence in the nation’s massive retirement program.


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