On Social Security's 90th Birthday, A New Idea To Solve Its Shortfall

Forbes

2 days ago

Since it was signed into law 90 years ago today, Social Security has become the most successful antipoverty program in American history and the foundation upon which most Americans plan their retirement. But changing demographics and policy mistakes have weakened that foundation and put the program on track for a crisis before the end of the next president's term. Policymakers must act quickly to strengthen the program without imposing an unfair burden on vulnerable seniors or working Americans.
At its conception, Social Security was designed to be an 'earned benefit' — workers pay a dedicated payroll tax on wages up to a certain level, and once these workers reach retirement age, they receive benefits to replace some fraction of the wages upon which they were taxed. But in practice, funds paid in by today's workers are used to pay the benefits due to today's retirees. And every year since 2010, the program has spent more on benefits than it raised in dedicated revenue because the ratio of workers to retirees is worsening as our population ages.
Unfortunately, today's policymakers have only compounded the problem. Last year, bipartisan majorities in Congress voted overwhelmingly to give higher-income retirees already receiving public pensions the opportunity to draw more generous benefits. And earlier this year, Republicans siphoned off a portion of the program's revenue stream in their 'One Big Beautiful Bill.'
Social Security's trust-fund system allows it to temporarily run deficits commensurate with the savings generated by past surpluses. But before the end of 2032, the bigger of Social Security's two trust funds is projected to be depleted, and benefits for retirees will be automatically cut by 24% to match the program's incoming revenues if no action is taken.
The prospect of such a steep and sudden benefit cut makes it difficult for current workers to plan for retirement and risks throwing vulnerable seniors into poverty. But simply continuing to fund scheduled benefits without any changes, whether by raising payroll taxes or by borrowing money to finance Social Security's growing deficits, would impose an unfair burden on working Americans to solve a problem created by previous generations.
Many people, particularly on the left, believe the simple solution is to just have the rich pay more in taxes or means-test their benefits. But it is virtually impossible to do this under a system in which benefits are based on a beneficiary's lifetime earnings without fundamentally eroding Social Security's premise as an earned benefit.
That's why my team at the Progressive Policy Institute (PPI) recently proposed an ambitious package of policy changes built around an innovative new concept: awarding benefits based on how many years someone works rather than how much they earned throughout their career. This approach would prevent the perversity of raising taxes on working Americans to give bigger benefits to the highest-earning retirees while preserving Social Security's status as a benefit that people earn through work.
Because this change alone is not enough to ensure long-term sustainability, we also advocate for a gradual increase in the retirement age to reflect rising life expectancies. Additionally, we propose reforming cost-of-living adjustments so they no longer overstate the effects of inflation. But we would preserve a special early retirement option for lower-income workers who haven't benefited from increased longevity, and bolster benefits for widow(er)s and older beneficiaries most at risk of outliving their savings.
While top earners would see modest benefit reductions about on par with those already projected to occur under current law, most retirees would be shielded from any reductions to their monthly benefits. In fact, many low-income or long-career workers would actually receive greater benefits than they currently do, ensuring that those who have contributed most diligently are rewarded for their efforts. Altogether, independent modeling showed that PPI's benefit reforms would close roughly half of Social Security's shortfall over the next 30 years while reducing elderly poverty.
Under the current system, in which benefits are based on a worker's contributions, the only coherent way to raise the revenue needed to close the remaining gap would be by increasing the payroll tax. But today's payroll tax rate is already more than seven times what it was when Social Security was created, making it an increasingly regressive tax on workers' wages. By transitioning to a system based on years worked, we make it practical to close Social Security's shortfall using progressive income tax changes and broader-based consumption taxes that spread the responsibility for fixing our nation's fiscal challenges fairly among all Americans.
These proposals offer a robust framework for radically pragmatic Social Security reform. But the longer policymakers wait to enact this plan or any other, the more painful solutions will become. Now is the time to address Social Security's shortfall in a thoughtful way that is fair to working Americans and retirees alike.