Can Congress Fix Social Security's Funding Crunch?

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Social Security’s cash shortfall is nearing, according to government accountants. The point at which the program’s trust fund of prior tax revenue runs out and legally triggers a 22% drop in payments is now estimated to hit at the beginning of 2033.

What can Congress do to head off disaster and keep the immensely popular program solvent? We expect lawmakers to find some solution. But anything they choose will be painful. The gap between what the Social Security Administration takes in taxes and what it pays out as benefits has been growing for decades. But before that, when the program was running a surplus, Congress spent the extra cash, leaving IOUs in the trust fund. Now, the Treasury is repaying those IOUs via money from general taxation and mounting debt issuance. Once the IOUs have been repaid, though, the feds can no longer pay more in benefits than they take in from Social Security’s dedicated payroll tax. Any fix will require more taxes, more debt or lower benefits.

Let’s look at some of the options on the table. Congress could let the Treasury sell more bonds to fill Social Security’s shortfall. That would sidestep the need for new taxes, but further blow up the deficit, which is already running at $2 trillion a year. Bond investors may balk at adding to it. Other common proposals get Congress partway to a solution. Among them:

• Lifting the full retirement age by a year eases the program’s tax gap by 12%.
• Raising the cap on earnings subject to the payroll tax would cover 26% of it. That’s assuming the cap rises from the present $184,500 of earnings to $330,000. Hiking the payroll tax one percentage point for everyone also yields 26% of the money Congress needs to find to keep scheduled benefits intact after 2033.
• Other options include reducing annual benefit increases and similar tweaks.

None solves the funding gap on its own, and all will be wildly unpopular among whichever voters find themselves paying more, getting less or doing both.

Given the difficult politics involved, we look for Congress to drag its feet and put off any solution for as long as it can. Social Security has long been known as the third rail of American politics. Calling for less-generous benefits or higher taxes is a surefire way to not get reelected. But the funding crunch can’t be wished away.

Ultimately, expect a mix of benefit cuts and tax increases, as lawmakers try to minimize the ways in which they antagonize voters. It’s too early to predict just how the pain will be distributed, but we would guess that upper-income folks will bear more of it than those lower down the income ladder. That may mean means testing for benefits, smaller annual increases, a higher cap on payroll taxes, etc.

This looming battle figures to dominate U.S. politics in the coming decade.

This forecast first appeared in The Kiplinger Letter, which has been running since 1923 and is a collection of concise weekly forecasts on business and economic trends, as well as what to expect from Washington, to help you understand what’s coming up to make the most of your investments and your money. Subscribe to The Kiplinger Letter.

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