Social Security is the largest single program in the federal budget. A recent blog post from the Congressional Budget Office (CBO) reports that in 2017, Social Security benefits will cost about 4.9 percent of total U.S. GDP. Over the next 30 years, that will grow to 6.3 percent as millions of boomers retire and collect benefits.
The CBO calculates that current annual revenues from Social Security taxes equal about 4.6 percent of GDP, and it expects that amount to remain flat or decline slightly to 4.5 percent over next 30 years. The main reason for the lack of growth in Social Security taxes relative to GDP is that in the decades to come, more Americans will be retired and fewer will be working and paying taxes.
As a result, the gap between benefits paid and revenues collected will grow from its current rate of 0.3 percent of GDP to 1.8 percent by 2047.
The CBO analyzed costs for 36 possible changes to Social Security that would help eliminate the gap. These possible changes fall into five categories:
- Increase revenues
- Change the formula that calculates benefit amounts
- Increase the full retirement age
- Change cost-of-living adjustments
- Adjust benefits for specific groups
It’s telling that none of these changes, by itself, would be the silver bullet that totally eliminates Social Security’s funding shortfall. For example:
- Gradually increasing the tax rate by 3 percent over the next 60 years would reduce the gap by 0.5 percent of GDP -- roughly one-third of the current amount.
- Gradually decreasing benefits by 15 percent over the next 10 years would have the roughly the same impact -- reducing the shortfall by about one-third.
- About two-thirds of the gap could be reduced by taxing earnings above the current wage base ($127,200 in 2017).
- Indexing the initial amount of benefits for future retirees by price increases instead of wage increases would also reduce the funding gap by about two-thirds.
The CBO blog post has a helpful graphic that shows the effect of various changes to Social Security.
Most likely, it will take a combination of revenue enhancements and benefit constraints to close Social Security’s deficit. The top candidates for increasing revenues are bumping up the tax rate or increasing Social Security’s taxable wage base. The top candidates for benefit constraints are gradually increasing the retirement age, reducing the monthly amount of benefits paid to future retirees and reducing future cost-of-living increases.
These changes will require Republicans to compromise on their position to resist any tax increases and Democrats to compromise on their position to resist benefit reductions.
An important precedent exists for such a compromise: The last time Social Security had a funding crisis was in 1983, when Republican President Ronald Reagan, a Democratic House led by Tip O’Neill and a Republican Senate passed a significant combination of tax increases and benefit constraints. To enhance revenues, both the tax rate and wage base were increased. To constrain benefits, increases to the retirement age were gradually phased in, and the formula for calculating benefits was modified.
At the time, these leaders realized there were no easy fixes to the Social Security funding crisis, so they made the necessary hard choices. Once again, there are no easy answers to fixing today’s funding challenges. But the sooner it happens, the better, so we can all have confidence in the future of Social Security.