Why We Refuse to Confront Social Security Insolvency

The Left & Right Cling to their False Narratives

(Originally appeared in The Atlantic)

Since the mid-1990s, Social Security trustees have warned lawmakers that insolvency was coming in the 2030s. Why are lawmakers seemingly content to wait until we reach that cliff, now projected for 2032? Because so many voters misunderstand how the system works and steadfastly refuse to accept the changes needed to fix it. Interest groups have capitalized on those fears, savaging any politician who dares to touch senior benefits or taxes. When House Republican Leader Paul Ryan proposed reforming Medicare, opponents ran a television ad portraying him pushing an elderly woman in a wheelchair off a cliff.

As policy, Social Security is not complicated. Closing the gap between revenues and benefits involves three broad levers: raising payroll taxes, hiking the eligibility age, and trimming benefit formulas for wealthier seniors. Fixing Social Security is a matter of negotiating how far to pull each lever. I’ve attended policy dinners where Republican and Democratic lawmakers quietly outlined, with relative ease, a plausible deal that would gradually raise the normal eligibility age from 67 to about 69, trim benefits for higher earners, and raise the annual earnings limit for the Social Security payroll tax to somewhere between $250,000 and $300,000.

So why haven’t they done it? Although Americans are aware that Social Security faces financial difficulties, we are also mired in collective denial about the inescapably painful decisions that will affect seniors, citizens, budget deficits, and the broader economy. Both liberals and conservatives fundamentally misunderstand Social Security. Let’s start with progressives. Their framework argues that Social Security is primarily an anti-poverty program for senior citizens. And those benefits, the story goes, are endangered by an inexplicable quirk in the law that applies Social Security payroll taxes to only the first $184,500 in annual wages (a figure that rises annually with wage inflation). Eliminate the cap, apply Social Security taxes to all wage income, and Social Security will automatically be funded for generations and could even pay for large benefit expansions.

The first problem with this argument is math. Social Security actuaries calculate that eliminating the wage cap (without those taxes accruing additional benefits) would keep the system out of deficit for just three years and close only about half of its long-term shortfall. So additional major solvency reforms are still necessary.

The second drawback is that Social Security’s public credibility rests on its perception as a pension-style, social-insurance system in which individuals earn their benefits with their tax contributions. This year’s payroll tax applies to only $184,500 in wages because no more than that amount can count toward one’s future benefit calculations. The U.S. is hardly unique here: Canada caps its public-pension contributions even more tightly, at roughly $85,000 in Canadian dollars (about $60,000 in the U.S.), and Britain’s National Insurance tax rate falls from 8 percent to 2 percent above roughly £50,000 (about $66,000 in the U.S.).

Raising the cap without raising earned benefits severs the link between tax contributions and benefits, and would make Social Security just another tax-and-spend redistribution program. And if we’re going to de-link taxes and benefits, lawmakers could achieve the same redistribution goals with less economic damage by instead cutting Social Security benefits for these high earners.

The third drawback to eliminating the tax cap is the opportunity cost. Currently, the top marginal tax rate on wage income—combining federal and state income and payroll taxes—is more than 50 percent in California, and nearly that high in many other states. Even liberal economists estimate that additional tax revenues begin leveling off as marginal tax rates reach the high 50s, and they begin losing money at rates somewhere between 60 and 73 percent. This leaves room to raise marginal tax rates on high earners by perhaps 6 to 12 percentage points. Raising the rich’s rates past that point may provide spiteful satisfaction but could reduce tax revenues, as high earners either stop earning additional wages or shift their compensation to lower-taxed investments or foreign jurisdictions.

If progressives wish to tax the rich at maximum rates, is closing perhaps half of the Social Security funding gap really the best use of those funds? Surely it would be better to trim Social Security benefits for high earners and then use the money from high-earner tax hikes to finance health care, education, child care, climate, infrastructure, and/or the safety net.

After all, Social Security mostly redistributes income upward, not downward. Today’s seniors are the wealthiest generation of the wealthiest country in world history, and senior poverty is so low that Social Security could easily guarantee a minimum senior income of 125 percent of the poverty line for a small fraction of the program’s cost.

And yet, over the next decade, Social Security (and Medicare) will spend trillions of dollars—more than $100,000 annually on wealthy married couples—on those seniors with six-figure post-retirement incomes and net worths in the millions of dollars. As a result, the federal government now spends six times as much on (usually wealthy) seniors as it spends on individuals under the age of 26. Is ensuring every dollar of these retiree benefits really the best use of all the remaining potential tax-the-rich revenues? Or should America instead invest any newly available tax revenues in young people and working families?

The conservative misunderstanding of Social Security is widely available in Facebook memes. These voters will tell you that an individual’s Social Security payroll taxes are stored in a trust fund—an extensive government savings account—until they retire, when those savings are returned to them in monthly checks. And because seniors are simply being repaid from their earlier contributions, the system would never have run a budget deficit were it not for the greedy politicians who raided the trust fund or all of the illegal immigrants who stole trillions of dollars from the program. Thus, simply repaying the trust fund and deporting the immigrants would restore Social Security to permanent solvency.

Obviously, none of this is accurate. Social Security surpluses and deficits are mixed with the rest of the budget and included in federal-budget totals. This year’s $250 billion cash shortfall—projected to reach $841 billion by 2036—contributes to Washington’s overall $1.8 trillion budget deficit that is rising toward $4.4 trillion. Payroll tax contributions are not saved—they are spent on the benefits of current retirees. Most retiring seniors ultimately collect benefits well exceeding their lifetime payroll tax contributions (even after adjusting for net present value, which incorporates inflation and an interest rate). As for immigrant fraud, undocumented workers paid roughly $26 billion into Social Security in 2022 and collected almost nothing back (legally or illegally), making them a net contributor rather than a drain.

Social Security insolvency is instead driven by three factors. First, by formula, Social Security’s inflation-adjusted annual benefit levels become more generous for each successive generation. Second, longer lifespans are expanding the number of benefit years that the system pays out. Someone retiring at age 66 and living until 90 will spend one-third of their adult life collecting benefits. Finally, a demographic bulge is producing 74 million retiring Baby Boomers while the number of taxpaying workers fails to keep up.

The Social Security trust fund was not stolen, because it was never designed to hold economic assets in the first place; it is merely some paperwork sitting in a filing cabinet at a federal office in Parkersburg, West Virginia. The trust-fund bonds are a paper asset for the Social Security Administration but a liability for the Treasury (meaning, the taxpayers) that must repay those bonds—which makes the federal government both the creditor and the debtor, no different than writing yourself an IOU.

So ignore the bonds and think of the trust fund this way: The Social Security system ran a $3 trillion surplus from 1983 to 2009, when the Baby Boomers were in their peak-earnings years. When the Boomers retired and the system fell into deficit in 2010, Social Security was legally entitled to run an equal $3 trillion deficit until the earlier “balance” is paid off, likely by 2032. In return for surrendering the earlier surpluses, Social Security is also receiving an additional $3 trillion in interest payments from the Treasury’s general revenues from 1983 to 2032—which likewise contribute to budget deficits.

The Social Security trust fund is an accounting mechanism that tracks these past surpluses and current deficits. When the math finally hits zero in six years, Social Security will no longer be legally allowed to run deficits. Without a change in law, the program will be required to slash benefits by 22 percent to match its annual tax revenues.

Social Security’s shortfalls are not driven by greedy politicians or immigrants but rather by a system that promised generous benefits to a very large generation that did not have enough children to finance all of these expensive promises.

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