A Simple Change to Restore Social Security Solvency
Under current law, the Social Security Retirement Trust Fund is projected to run out by 2034, requiring benefits to be cut by more than 20 percent. The Social Security Trust Fund’s shortfall is driven partly by the formula that determines benefits for each retiree. Under the current “wage indexing” formula, benefits are projected to climb by more than 150 percent in real terms (over and above inflation) over the next 75 years. An average-income one-worker couple could get benefits that would be nearly 50% higher than the current average family income, before any saving or pension income the family might also enjoy. Some upper-income two-earner married couples could become entitled to benefits of $155,000 a year in today’s dollars. To maintain this kind of benefit growth under current law and balance the Social Security Retirement and Disability Trust Fund, payroll taxes would have to increase by 38 percent from the current 12.4 percent to 17 percent. An alternative to raising payroll taxes to balance the Trust Fund is to trim the growth of future benefits by simply switching from wage indexing of benefits to price indexing. Under the alternate price indexing formula, benefits would increase more slowly. Over the next 75 years, benefits would increase by between 60 and 80 percent in real value. Although switching to price indexing would solve Social Security’s long-term funding gap, there are other issues that still need to be addressed such as the short-term funding gap in the retirement program, short- and long-term imbalances in disability insurance, and whether Social Security should be reformed comprehensively.