May 15, 2020
Last month the Social Security Trustees published their annual report on the state of Social Security. Although two of the appointed trustee positions are vacant and the Trump administration has repeatedly called for cuts to the program, the Trustees (all Trump appointees) agree the program’s long-term outlook is optimistic.
Social Security, the program that provides retirement and disability benefits to millions of Americans every year, has a projected shortfall equal to 3.21 percent of taxable payroll over the next 75 years. The program’s benefits are fully funded through 2034, after which they are 79 percent payable, assuming no changes are ever made.
The projected shortfall means that to fully fund the program, payroll taxes would have to be increased by 3.21 percentage points. This is an increase from last year’s 2.78 percent projected shortfall, likely due to the decreased projections in average wage growth over the next 50 years. In 2019 the trustees predicted that average real wages would grow by 1.42 percent annually over the next 30 years; this year, they predict only 1.29 percent annual growth.
An increase in taxes is never trivial, particularly for low-income workers. However, even with this year’s lower wage growth projections, it is clear that growing wages have a much greater impact on the average worker’s financial situation than the increased taxes. These amounts are compared in Figure 1 below.
While it is unlikely that the Trustee’s projections will hold up over the next 50+ years, they still illustrate the relative importance of wage growth compared to the tax increase. Figure 2 shows what would happen to a salary of $50,000 per year in 2020 over the next 30 years. Based on the average wage increase, this salary would grow to $68,084 at the current payroll tax rate, and $65,754 if the tax were increased to fund the program fully.
In addition to being easily fixable, it is important to note that the shortfall in the Social Security trust fund is not an indicator of the function of the program itself. A large portion of the shortfall is directly tied to the increase in income inequality. The payroll tax which funds the program is only levied on the first $137,700 of wage income per year (in 2020), allowing many higher-income workers to escape paying into the program at the same rate as the rest of the population. When that cap was first established in 1983, only 10 percent of wage income was over the maximum, but by 2016 it was more than 17 percent. In this same time frame, the lower-earning population who pay a greater effective tax rate have not experienced the same wage growth as high earners.
Social security is an incredibly popular program that supports over 62 million Americans every year. In addition to providing retirement and disability benefits, it is also responsible for pulling more children out of poverty than any other program.
With such compelling evidence of its value and near-universal support from the American people, there is no reason Social Security should be viewed as “struggling.” Moreover, solutions to the projected shortfall are many: 1) slightly increase the payroll tax (as discussed above); 2) remove the tax cap on very high earners; or 3) to simply add money to the trust fund.