This year’s Social Security Trustees’ report includes some fairly large changes from last year, not because of the pandemic, surprisingly, but because of changes to economic projections. Although two of the Trustee positions remain vacant, the Trustees agree that the program’s future is still mostly sound.
According to their report, if nothing changes, the trust fund is fully funded through 2033. After that, the benefits are 74 percent payable (down from 79 percent in last year’s report). The fund has a projected shortfall of 3.54 percent of payroll over the next 75 years. This shortfall is a fairly large increase compared to last year’s projection of 3.21 percent of payroll. The report attributes virtually all this increase to advancements in the economic models used to forecast the fund’s future (things like birth rates, labor force demographics, etc.)
A shortfall of 3.54 percent of payroll means that payroll taxes would need to be increased by 3.54 percentage points to fully fund the program. While this would constitute a relatively modest increase, no tax increase is unimpactful, particularly for low-income workers. However, the Trustees project substantial increases in wages over the next 75 years. That growth overwhelms the impact of the tax increase.
The Trustees predict that real wages will rise 47.2 percent by 2051. This is a slight increase over last year’s report which projected a 47.1 percent rise over 30 years. Figure 1 compares the average wage growth to the tax increase needed to keep Social Security fully funded. Ensuring strong wage growth is far more important to workers than a small tax increase.
Figure 2 shows the effects of a potential tax increase on a starting salary of $50,000 over the next 30 years. The base salary is projected to grow to $72,619 by 2051 with no payroll tax deduction. If the Social Security program were to remain unchanged, the salary would grow to $68,117. Were it modified to erase the shortfall over those 30 years, the salary would be $65,546.
This report comes with some extra uncertainty since it is difficult to make economic predictions during an ongoing pandemic. Nevertheless, it is clear that Social Security is strong and will continue to provide its vital supports for many years to come. As wage growth is highlighted as a key element of the program’s longevity, it is important to note that income inequality, and not the program itself, is at fault for much of the trust fund shortfall. In 1983, when the payroll tax cap on the program was implemented, only 10 percent of wage income was over the threshold. However, in the next decade over 18 percent of salary income is projected to be over the cap.
The Social Security trust fund shortfall is modest, and only modest solutions are needed to address it. For example, the government could simply add money to the trust fund. Although the trust fund and the supporting payroll tax are generally presented as separate from the rest of the budget, that isn’t really how government spending works; it all comes from the same pot. Alternatively, the payroll tax cap could be eliminated, or a small tax increase could be levied.
But why stop there? Any combination of these modest solutions could be implemented to grow the program beyond the last expansions almost 50 years ago.