Congress Must Act Soon to Save Social Security, Actuaries Say

With Social Security’s combined trust fund reserves projected to become depleted around 2034, the American Academy of Actuaries is urging Congress to focus on the issue immediately, as delaying action will make a solution more difficult. Waiting will gradually limit the viable options available to any solutions that rely on increasing taxes, the actuaries argue. 

If Congress does not take action by 2034, Americans will be faced with an automatic 20% cut to people already receiving benefits, as well as the need to immediately increase Social Security taxes by 25% or some combination of cuts in benefits and increases in taxes, according to a new issue brief released by the American Academy of Actuaries. 

By acting sooner, the brief states, tax increases and benefit reductions can be phased in gradually.  

“Earlier action is also important to individuals, as it provides them more time to plan and adjust to the changes, enables them to make better decisions now, and provides greater confidence that they will receive their benefits,” the report stated. 

The last time trust funds were close to depletion was in 1983, and the cash shortfall that year was 1.0% of taxable payroll. In contrast, the expected cash shortfall in 2034 will be three times as large (3.12% of taxable earnings), so paying all benefits in 2034 would require much larger tax increases and benefit reductions than were needed in 1983. 

The American Academy of Actuaries recommended several options to address the revenue generation side of the Social Security solvency issue, including some that could be legislated immediately and phased in gradually. 

Tax Increases 

If Congress were to increase the payroll tax rate by 25%, this would raise the current 6.2% Social Security tax rate to 7.75% for both workers and employers, yielding enough to pay 100% of benefits in 2034. However, increasing the tax rate would be financially difficult for low-income employees, the report stated, unless the Earned Income Tax Credit was also increased, which would offset the higher payroll tax for low-income people. 

The authors of the report argued that it would be less disruptive to employers and workers if increases in the tax rate were gradually phased in by 0.1 percentage point per year, for example, but that approach would need to be enacted soon in order to pay all benefits through 2034.  

Another option would be to eliminate the taxable maximum income, which is $160,2000 in 2023, so that all earnings are taxed. This approach would avoid impacting low-income workers, but it could be a large tax increase for high-income workers and their employers. It would not be enough by itself to cover the 2034 shortfall, projected to raise only 78% of the necessary total.  

Congress could also phase in a tax on all earnings greater than $400,000 or increase the taxable maximum so that 90% of all earnings would be subject to the payroll tax. These two provisions would provide only 55% and 36%, respectively, of the amount needed to pay all benefits in 2034, so additional changes would be needed, the report found. 

Increasing Social Security’s Investment Income 

Because Social Security is not allowed to invest in corporate stocks or bonds, its investment returns over the long run average about two percentage points lower than that of the diversified portfolio of a typical pension plan. 

The Academy argued that Congress could compensate Social Security for this restriction by giving its special-issue Treasury bonds an additional 2% return. But again, this would increase the national debt, unless Congress increases a tax to pay for it, such as the capital gains tax, according to the Academy. 

In addition, the report found that this option would have no impact on the 2034 shortfall if enacted in 2034. It would need to be enacted soon, while the trust funds have assets, and “even that will not provide much help,” according to the Academy. 

Cover Remaining State, Local Government Employees 

While this would only account for 8% of the 2034 shortfall if enacted today, the Academy offered that Congress could cover remaining state and local government employees who currently do not have Social Security.  

This would likely have a minimal impact, because many state and local government employees are already covered by Social Security, and “probably only new hires would be required to be covered.” 

As with many of the other potential solutions, the Academy said it would require “very significant restructuring” of several state and local government retirement systems and might encounter “significant opposition.” 

Combination of Benefits Reductions, Tax Increases 

The Academy also suggested that benefits reductions could help address the shortfall, such as by reducing benefits for higher-income recipients who are not yet eligible for benefits; gradually raising the Normal Retirement Age to reflect longer lifespans; and reducing the COLA. But even if all those provisions are enacted soon, an increase in Social Security taxes would still be needed to substantially cover the shortfall.  

Additionally, eliminating the 2034 shortfall does not guarantee that benefits will be payable forever, but the Academy argued that addressing the immediate concern of paying all scheduled benefits in 2034 is a requisite step to solving Social Security’s long-term solvency problem.  

In order to give workers more time to plan and adjust to the changes the shortfall will bring, the Academy stressed that action must take place sooner rather than later.