Social Security is the largest federal spending program, providing crucial financial support to millions of Americans, including retirees and individuals with disabilities. However, without significant reform, the program is facing a looming crisis. The combined trust funds of Social Security are projected to be depleted by 2035, potentially resulting in a 17 percent reduction in benefits for recipients.
For years, the financial outlook of Social Security has worsened as the number of beneficiaries has risen and the ratio of workers contributing to the program has dropped. This growing gap between contributors and recipients has left the program on an unsustainable path. With reform, however, gradual and forward-looking adjustments can be made to ensure Social Security continues to serve its vital role for Americans.
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The Growing Social Security Funding Gap
Social Security consists of two primary trust funds:
- Old-Age and Survivors Insurance (OASI) Trust Fund, which provides benefits to retirees, their survivors, and their dependents.
- Disability Insurance (DI) Trust Fund, which supports individuals who are unable to work due to medical conditions, as well as certain family members.
Together, these two funds make up the OASDI Trust Fund, which is showing a growing financial deficit. The main issue has been demographic shifts. The aging population has increased the number of beneficiaries, with the number of people over 65 rising from 43 million in 2010 to 59 million in 2024. Meanwhile, the number of workers paying into the system has decreased, from 2.9 workers per beneficiary in 2010 to 2.7 workers in 2024.
The Social Security funding gap, which measures the amount of income needed to keep the program actuarially sound over the next 75 years, has increased substantially. In 2010, the gap was 1.9 percent of payroll taxes. By 2024, it had grown to 3.5 percent, a worrying 84 percent increase.
Possible Solutions to Secure Social Security
Several steps can be taken to address the funding gap, including raising revenues and reducing spending.
Raising Revenues
- Increase the Payroll Tax Rate
Social Security is primarily funded by a 6.2 percent payroll tax levied on both employees and employers. Gradually raising this rate could help bridge the gap. In 2010, a gradual increase to 14.4 percent could have solved nearly three-quarters of the funding shortfall. If enacted today, such an increase would close only 43 percent of the gap. - Eliminate the Taxable Maximum
Currently, Social Security taxes are applied only to the first $168,600 of income. If lawmakers eliminated this cap, they could significantly raise revenue for the program. In 2010, removing the cap could have closed nearly the entire funding gap. If enacted today, it would cover 53 percent of the current gap.
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Reducing Spending
- Link Initial Benefits to Prices Instead of Wages
Social Security benefits are currently based on average lifetime earnings, which rise with the overall standard of living. Switching to price indexing, where benefits grow with inflation instead of wages, would significantly reduce spending. In 2010, this policy could have eliminated 131 percent of the funding gap, and it would close 85 percent of the gap today. - Reduce Benefits for High Earners
Social Security’s primary insurance amount (PIA) is calculated using a three-tiered formula based on earnings. Reducing benefits for higher earners while maintaining current benefits for lower earners would save money. Implementing this in 2010 would have reduced one-third of the funding gap, but today it would close 25 percent of the gap. - Raise the Retirement Age
The full retirement age (FRA) is currently 67, which was last increased in 1983. If lawmakers had gradually raised the FRA to 70, in line with rising life expectancy, it would have closed 32 percent of the funding gap by 2010. Today, raising the FRA to 69 and indexing it for life expectancy would cover 38 percent of the gap.
Conclusion
Social Security’s financial situation is dire, and lawmakers are running out of time to prevent a reduction in benefits. While it would have been ideal to act sooner, options remain to secure the program’s future. A combination of raising revenues and reducing spending could stabilize Social Security and prevent a drastic benefit cut. However, the longer lawmakers delay reform, the more difficult and disruptive the necessary changes will be.
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