Those who pay close attention to Social Security will remember the latest trustees’ report detailing how the Social Security trust fund could become scarce of money as early as 2034 unless Congress acts to shore up the system’s finances. The report also noted that “policymakers have many options for changes that would reduce or eliminate funding gaps over the long term.”

A few years ago I wrote that it is unfortunate that we are still in this situation because there are pragmatic solutions to shore up the financing of Social Security. Time is running stronger, but realistic solutions remain. What has been lacking is the political courage to act on a difficult issue.

First some context

The harsh reality is that it will cost more, as part of the payment, in the future to achieve the same standard of living in retirement that retirees enjoy today. Longer lives for many Americans, along with higher health costs and an aging workforce, means that the same retirement results will require more resources to be set aside while working. This is why people working on retirement issues have long been concerned with strengthening Social Security and workplace retirement programs.

Because the Social Security program has been projecting future deficits for many years, it’s easy to become pessimistic and believe that solutions are hard to find. However, it’s also important to take a step back and understand that these projections have been pretty consistent over time, and the real reason we keep hearing the same warnings is that no major corrective action has been taken.

The rates used to fund Social Security benefits have not changed often, although it may seem that way. In fact, I was probably asking my parents for an Atari the last time Congress acted to change the rates in a law passed in 1983. That effort has kept costs stable (as a percentage of payroll) for 40 years and is likely that’s enough for another 10. But, for a number of reasons, it’s not enough to support current profit levels forever.

The trustees’ report continues to warn about the deficit because they have known about it for a long time, but it is the lack of action that keeps the problem in the headlines.

The rate-setting process used in 1983 was based on economic and demographic projections. In retrospect, any impartial person would admit that it was done well. There aren’t many areas where we still rely on financial projections that were developed so long ago, given the number of unanticipated developments since then.

Kudos to the Social Security actuarial team of the early 1980s for developing projections that will end up working for fifty years. Now, though, it’s time to pay attention to what your actuaries are saying today.

Would Congress really allow massive cuts to take effect?

It is often said that if corrective measures are not taken to fund Social Security, benefit cuts of 20 to 25 percent will be applied. There are good reasons to doubt this assumption.

First of all, to say that this would be detrimental to retirees, a growing part of the population, is an understatement. Second, this is a group that policymakers frequently target to help, not harm, given the political incentives that exist.

For example, George W. Bush, who faced a challenging re-election in 2004 (and what presidential race isn’t challenging these days?), fought to add prescription drug coverage for seniors under Medicare. Many of those who opposed the bill did so because they wanted it to be more comprehensive, not less.

Eventually, lawmakers will take action on Social Security’s finances. Cutting Social Security benefits is politically untenable because the program increasingly serves as a financial lifeline for millions of older Americans, and is one of the programs that enjoys broad bipartisan support. But the longer Congress waits, the more expensive the final solution will be.

If lawmakers wait until the last minute, they will most likely have to tap other federal resources, such as general fund revenue, to maintain current benefit levels and avoid backlash from benefit cuts. This use of general fund revenue is a line that is rarely crossed. And perhaps never as directly as in this potential scenario.

Since taxes on income and other federal sources of revenue are generally more progressive than the payroll taxes that support Social Security, there are implications for who pays these benefits. While all of that may sound a little weird, the short story is that those with higher incomes would find themselves paying more of the cost of Social Security without receiving more benefits. This could affect political support for the program, which has always maintained a connection between payroll taxes paid and benefits received, even with a progressive benefit structure.

As with any other form of retirement savings, time is on the side of those who save early, and this is as true for Congress and Social Security as it is for an office worker depositing savings into his 401(k). The options to strengthen Social Security’s finances only get more costly as we get closer to the trust fund depletion date, and potentially making up the shortfall with general fund revenue would be one of the most costly options of all. Congress could demonstrate a real commitment not only to the growing senior population, but also to fiscal responsibility by acting soon to shore up Social Security funding.

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