Now is the time to act to avoid “draconian” cuts to Social Security benefits, warns a recently released issue brief.
And doing so, continues the Center for Retirement Research at Boston College in “Social Security’s Financial Outlook: The 2023 Update in Perspective,” would be a more equitable way to address the system’s chronic financial woes and risks.
The center argues for spreading the burden of boosting the fortunes of the Old-Age and Survivors Insurance (OASI) trust fund “across all taxpayers” and not just among current employees. It contends that doing so would better address the long-term OASI deficit and make doing so more equitable.
The brief notes that the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance (OASDI) Trust Funds, in its 2023 report to Congress, slightly increased its projection of the 75-year deficit for the trust fund by 0.19 percentage points from 3.42% of taxable payroll in 2022 to 3.61% in 2023. Further, the brief observes the Board warned that the OASI trust fund would be depleted a year earlier than they had said a year before and could happen as soon as 2033.
So why is there a shortfall in the first place? The center, in the brief, blames “pay-as-you-go” financing. They say that this kind of financing resulted from a policy decision in Social Security’s early days to pay benefits far in excess of contributions. This, the brief says, “essentially gave away” the trust fund that otherwise would have accumulated, as well as the interest on those funds.
The center attributes the increasing costs of the Social Security system to demographics — especially the lower fertility rates after the post-World War II baby boom. That drop, in conjunction with the consequent slower growth of the workforce and the retirement of the Baby Boom generation, spells a 75-year deficit.
The brief reports that the Trustees’ intermediate assumptions say the cost of the OASDI program will quickly rise to about 17% of taxable payrolls in 2040 and then around 18.5% of taxable payrolls in 2078 but then will drop slightly.
But the center says that just addressing the 75-year funding challenges “is not the end of the story.” They say this is because the policies that bring about the changes that will accomplish that “will show a deficit in the following year as the projection period picks up a year with a large negative balance.”
All is not lost, the brief suggests. It notes that the “depletion” does not equate to “bankruptcy.” Why? Because payroll taxes will still be infusing the system with more funds, the Trustees project that they will be sufficient to cover 77% of the benefits that the system is supposed to at the start of the period and will cover 71% at the end of the 75 years.
More sobering is the center’s report that absent intervention and relying only on tax revenue, the replacement rate for the pre-retirement earnings of a 65-year-old employee would fall from 36% to 27% — which it says would be the lowest replacement level since the 1950s.
Call to Action
“The impending depletion of trust fund assets is the ideal time to rethink the program’s financing structure and to consider whether a general-revenue component might be appropriate,” the center asserts.
Turning to general revenue as an aid in addressing the financial challenges facing Social Security is justifiable because Social Security costs are high due to the absence of the trust fund that would have been there if it had not been for past policies, the center says. They posit that if Social Security benefits stay at current-law levels, there is “little rationale” for relying on current employees to provide funds through higher payroll taxes. They argue that boosting the trust fund through income tax would be more equitable.
“The fact that in 2033 Social Security would be able to pay only 77 percent of scheduled benefits should focus our collective minds,” says the center.