This is the third installment in a series of articles addressing the future of Social Security.
In previous posts, I outlined the problems facing Social Security and examined the pros and cons of raising payroll taxes. Now, I will discuss the implications of another commonly proposed solution: reducing benefits.
Based on 2016 projections, Social Security trust funds will be exhausted in 2029. If reforms are not enacted, the nonpartisan Congressional Budget Office predicts benefits will need to be reduced by 29 percent in 2030. Such a reduction would likely be met with political protests (as seen in other countries) while America’s poorest and most vulnerable citizens suffer the consequences.
Beyond the chain-reaction benefit reduction that would result from doing nothing, reformers have proposed other plans to save Social Security by reducing benefits.
Some policymakers advocate for raising the Social Security retirement age. The original retirement age, or the age at which someone could receive full Social Security benefits, was 65. This has since been raised to 67 for citizens born after 1960. Raising the retirement age acts as a form of reducing benefits by asking employees to work longer for the same amount of retirement compensation.
The argument for increasing the retirement age is straightforward. Proponents point out that Americans are living longer, healthier lives than when the program was established. While this is generally true, low wage earners have a considerably lower life expectancy, creating concerns about the equity of raising the retirement age.
Another proposal focuses on reducing benefits for the wealthy by asking them to pay more into the system while limiting the amount they can receive later. Social Security benefits are indexed to lifetime earnings (using an individual’s 35 highest income-earning years). Therefore, for this plan to work, policymakers would need to raise taxes on the rich and then cap the benefits they could receive in retirement.
In addition to the drawbacks described in my previous installment, this type of tax hike would likely encourage tax avoidance. According to a 2009 report from the Government Accountability Office, tax avoidance schemes such as S-corps provide a legal means of avoiding payroll taxes. The report states:
Using IRS data, GAO calculated that in the 2003 and 2004 tax years, the net shareholder compensation underreporting equaled roughly $23.6 billion, which could result in billions in annual employment tax underpayments.
Increasing the retirement age and cutting benefits for the wealthy are just two variations of proposals that rely on benefit reductions to stabilize Social Security. This is on top of any automatic reductions that would take place if the system is left in its current state.
Raising taxes, reducing benefits, or a combination of the two can be used to effectively address the crisis Social Security will face in the next decade, but none of these options address the fundamental structural issues of the program.
As a pay-as-you-go transfer program, Social Security will always be vulnerable to the problems associated with unfunded liabilities. While we may be able to address our immediate concerns, maintaining the current structure of the program will likely ask future generations to pay increasingly larger taxes for fewer benefits.
In my final installment, I will explore the possibility of the United States transitioning to a market-oriented Social Security system.