Social Security is A Little Bit Harder to Secure

Social Security's finances are far from secure, and every year that Congress waits before addressing the problem makes it harder to fix. This week, the Social Security actuaries updated their estimates of options to restore solvency based on the assumptions in the 2014 Social Security Trustees report. Most of the options save a similar amount as last year but close a smaller percentage of the larger shortfall.

The most recent Trustees report showed a slightly bigger shortfall than last year, mostly because of slower short-term economic growth and the addition of one more high-deficit year at the end of the 75-year estimation window. Even though most policies would save about the same amount, the shortfall has grown by 6 percent, so each option closes a slightly smaller percentage of the shortfall.

Social Security Solvency Options
  Percent of Shortfall Closed
Policy 2013 2014
Eliminate the taxable maximum, taxing all wages at 12.4% 70%  66%
Increase the taxable maximum to cover 90% of wages 28%  27%
Gradually increase the normal retirement age from 67 to 68 13% 12%
Adopt the chained CPI 20% 19%
Make progressive changes to Social Security's benefit formula, as the Simpson-Bowles Committee recommended 34%  31%
Reduce the spousal benefit from 50% to 33% of their partner's earnings 4% 4%
Increase the combined payroll tax rate from 12.4% to 15.3% 101% 95%
Reduce benefits for all beneficiaries by 17.5% 100% 94%

Source: Social Security Actuaries

A hypothetical solution that would have closed the shortfall last year now only closes about 95 percent of the shortfall. Previously, a 2.9 percentage point tax increase (raising the combined payroll tax from 12.4% to 15.3%) would be enough to solve the shortfall. Now, that increase would need to be 3.1 percent. Similarly, a 17.5 percent reduction in all benefits would have addressed the shortfall last year, but it would need to be 18.4 percent this year. Furthermore, these options assume the changes are made immediately. Waiting 20 years requires changes to be 50 percent larger.

Since 2010, the shortfall has grown dramatically due to changes to economic and demographic assumptions. At that time, the recommendations of the Simpson-Bowles Commission, which proposed a mix of raising new revenue and slowing the growth of future spending, were enough to close 112 percent of the shortfall, leaving a comfortable surplus in the Social Security system. If those same proposals (delayed four years) were estimated today, they would only close three-quarters of the 75-year shortfall.

Many criticized the Simpson-Bowles plan for changing benefits too drastically, but even larger changes would be needed today than if Simpson-Bowles had been enacted. A plan would need to increase revenues 75 percent more than the Simpson-Bowles plan simply to provide the same level of benefits it provided. Further delay in dealing with Social Security will mean Congress will need to enact even greater revenues and/or benefit reductions than Simpson-Bowles proposed to achieve solvency.

Social Security's trust fund is projected to be insolvent by 2033, and the closer we wait to that date, the more drastic the changes will be needed to restore solvency. In order to minimize disruptive changes to the economy and the benefits received by seniors, Congress should act sooner, rather than later.

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