Ten Options to Secure the Social Security Trust Fund
The Social Security trust funds are expected to be insolvent by 2033 according to the Congressional Budget Office (CBO) and by 2035 according to the Social Security Trustees, and face cash deficits of roughly $2.3 trillion through 2031. Upon insolvency, benefits will be immediately cut across the board by one-fifth to one-quarter, without legislation to extend solvency. Trust fund solutions are needed to ensure Social Security solvency and bring program spending and revenue in line over the long term.
The Social Security trust fund is technically two trust funds: the Old Age and Survivors Insurance (OASI) trust fund for retirees and survivors and the Social Security Disability Insurance (SSDI) trust fund for disabled workers. They are financed primarily through a 12.4 percent payroll tax, split equally between the worker and the employer, on the first $147,000 of earnings. Though the trust funds have a combined $2.9 trillion of reserves, ongoing deficits will deplete those reserves in the coming years.
Below, we highlight ten possible options to improve the financial status of the Social Security trust fund by increasing taxes, broadening the payroll tax base, changing how benefits are calculated, and raising the retirement age. These options are meant to serve as illustrative examples and are just a few of the many available options to prevent insolvency. Many of these options can be adjusted in numerous ways; in fact, our Social Security Reformer tool lets users adjust these and other parameters to design a full solvency package.
For each option, we show the ten-year savings in dollars, the percent reduction in the 75-year shortfall, and the percent reduction in the 75th year deficit as estimated by the Office of the Chief Actuary of the Social Security Administration.
Ten Options to Secure the Social Security Trust Fund
|Policy||Ten-Year Savings||75-Year Shortfall Reduction||75th Year Deficit Reduction|
|Increase payroll tax rate by 1%||$1.0 trillion||28%||23%|
|Increase taxable maximum to 90% of earnings ($350,000)||$830 billion*||22%||14%|
|Eliminate the $147,000 taxable maximum||$1.8 trillion*||68%||60%|
|Subject cafeteria plans to the payroll tax||$470 billion||10%||6%|
|Cover newly-hired state and local government employees||$150 billion||3%||-4%|
|Grow initial benefits with prices instead of wages||$90 billion||97%||184%|
|Reduce initial benefits for high earners||$45 billion||34%||39%|
|Increase earning years included for benefits from 35 to 40||$35 billion||13%||14%|
|Calculate Cost of Living Adjustments using chained CPI||$245 billion||18%||18%|
|Raise retirement age to 69 and index for life expectancy||$90 billion||36%||56%|
Source: Social Security Administration
Note: Ten-year savings estimates only include effects on Social Security. Several options may have effects on other parts of the federal budget as well.
*Both options would gradually phase in the policy through 2028 and provide limited benefits on the newly-taxed income.
On the revenue side, policymakers could raise the payroll tax rate, increase the amount of income subject to the payroll tax, or broaden the payroll tax base. Simply increasing the payroll tax rate by one percentage point from 12.4 to 13.4 percent (split equally between the worker and the employer) would close 28 percent of Social Security's solvency gap and 23 percent of its structural gap. Eliminating the $147,000 taxable maximum for the payroll tax -- and adding benefits based on the newly-taxed income – could close as much as 68 percent of the solvency gap and 60 percent of the structural gap. Increasing the cap or imposing the cap only above some income would save less, while reducing the benefits paid on higher earnings subject to the tax cap would save more.
Broadening the payroll tax base could further improve solvency. For example, eliminating the deductibility of cafeteria plans, which allow employers to offer fringe benefits to employees on a pre-tax basis, would close 10 percent of the solvency gap and 6 percent of the structural gap. Covering all newly-hired state and local government employees in Social Security would close 3 percent of the solvency gap. Both of these options, particularly including state and local employees, would reduce Social Security deficits more in the near term because they would raise revenue quickly but pay out benefits based on the newly-taxed income over the longer term. Importantly, most revenue options interact positively together, so enacting them together can raise more than the sum of their parts.
On the benefits side, we highlight four options to change how benefits are calculated, including three changes to the initial benefits enrollees receive and one change to the cost-of-living adjustments (COLAs) that increase benefits with inflation after that. One change would price index initial benefits, meaning that enrollees' average lifetime earnings would be adjusted for inflation rather than wage growth for determining benefits. This change would close almost all of the solvency gap and close all of the structural gap and then some. Another option would make the benefit formula more progressive by increasing the benefit formula at the bottom end and reducing it progressively above that, reducing benefits the most for the highest earners. This could be done in any number of ways, but the version we included above – adopted from the Social Security Reform Act of 2016 – would close a third of the solvency gap and 39 percent of the structural gap.
Another option would increase the number of years considered for average lifetime earnings from 35 to 40, meaning that more low- or zero-earning years would be considered and therefore reduce benefits. This change would close one-eighth of the solvency gap and one-seventh of the structural gap. The final option would switch to the Chained Consumer Price Index (Chained CPI), which is considered a more accurate measure of inflation than the CPI-W and grows about a quarter of a percentage point slower on average each year. This change would close about a fifth of the solvency and structural gaps. Because the initial benefit options would only affect new beneficiaries and the chained CPI would compound over time, these options would save more over the longer term than in the short term.
The last option on our list would increase the normal retirement age, which is currently set at 67. The option would gradually increase the retirement age by two months per year until it reaches 69, then index it for life expectancy (growing roughly one month every two years). The option wouldn't change the early retirement age of 62, but it would require seniors to wait longer to get their full benefit. Raising the age in this way would close one-third of the solvency gap and over half of the structural gap.
These are just ten of countless options that are available to ensure Social Security solvency, and the options themselves can be adjusted in a variety of ways. With insolvency roughly a decade away, lawmakers should not wait to enact trust fund solutions for Social Security.
*Note: The first paragraph has been updated to reflect the 2022 Social Security Trustee's Report and the May 2022 CBO baseline.