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Social Security recipients will get a 2.5 percent cost of living adjustment (COLA) in January. That is not much to help seniors keep up with rising prices, but it is enough to tax the already stressed trusts funding the program.
The Social Security’s Old Age and Survivors Insurance (OASI) Trust Fund is expected to run out of money in 2034, according to the Congressional Budget Office (CBO). That would trigger a cut in benefits of 23 percent.
The Disability Insurance (DI) Trust, which pays benefits to disabled workers and their families, is projected to become insolvent in 2064.
Why is Social Security Running Out of Money
Spending more than you bring in is not a sustainable financial plan. And that is what social security is doing. The program is paying more to the 68 million beneficiaries than it is collecting in taxes and interest.
This year, the OSAI and DI trusts will bring in just over $1.381 trillion in revenue. However, paid benefits will reach a little over $1.482 trillion for both programs. That is a negative difference of more than $100 billion.
There are several reasons for the shortfall in Social Security.
The population is aging. More people are living longer and there are fewer working-age people contributing to the plan. The number of Americans 65 and older will increase from about 61 million in 2023 to about 77 million by 2035.
In 1960, there were 5.1 workers paying into Social Security for every beneficiary. However, the ratio is steadily shrinking. In 2023 there were 2.7 workers per beneficiary. That figure is expected to drop to 2.4 workers per beneficiary in 2035.
In addition, the current Social Security tax rate of 12.4 percent (6.2 percent each from workers and employers) has not been increased since 1990. On top of that, high-income earners do not pay Social Security taxes on earnings above $168,600.
Election Impact on Social Security
Pledging to protect Social Security is always a staple of any presidential campaign and this year is no exception. Most candidates make the pledge but offer few specifics on how they would do that. Again, this year is no exception.
Trump’s Impact
Former president Donald Trump has proposed tariffs on nearly any nation importing goods to the United States. He often says the revenue he expects from that plan will pay for any and all government expenditures. However, most economists disagree saying that tariffs would increase the cost of goods for American consumers.
Last week the Committee for a Responsible Federal Budget (CRFB) released an analysis of the impact of Trump’s proposals on Social Security. The results were not optimistic.
The CRFB determined that Trump’s proposals would reduce Social Security’s funding by $2.3 trillion by 2035. That would mean the trust fund would become insolvent in 2031 – three years earlier than current projections.
For retirees, Trump’s policy would result in a 33 percent cut in benefits instead of the 23 percent forecast previously.
Specific Trump proposals cited as damaging Social Security’s financial health included:
- Ending taxation on Social Security benefits. This would end a source of revenue for the program.
- Ending all taxes on overtime and tips. Some of those taxes help fund Social Security.
- Tariffs. The increased cost of consumer goods could reinvigorate inflation or reduce payrolls, resulting in lost tax revenue.
- Immigrant deportation. A hallmark of Trump’s campaigns has been a call for restricting immigration. The CRFB says deportation would reduce the number of immigrants paying into the Social Security trust funds.
The CRFB analysis is the latest to sound the alarm about Trump’s plans.
However, it is not the only one.
The Tax Foundation determined that the former president’s plans to eliminate Social Security taxes cut revenue to the program by almost $1.6 trillion from 2025 to 2034.
Harris’s Impact
Both as a candidate and as an officeholder, Vice President Kamala Harris voiced support for Social Security. In fact, her record shows advocacy for expanding the program and tapping higher incomes to pay the costs.
“She will strengthen Social Security and Medicare for the long haul by making millionaires and billionaires pay their fair share in taxes,” the Harris campaign states.
She supports raising the $168,600 cap on income taxed for Social Security.
As a senator, Harris co-sponsored the Social Security Expansion Act which proposed changing the COLA formula to more accurately reflect the impact of inflation on seniors. Many senior advocacy groups have long supported that change.
“This year represents another lost opportunity to grant seniors the financial relief they deserve by changing the COLA calculation,” Senior Citizens League Director Shannon Benton said of this year’s COLA announcement.
The Social Security Expansion Act also allowed for more aggressive payroll tax collection to help fund the expansion.
As vice president, Harris supported President Joe Biden’s proposal to raise more revenue from high-income individuals.
Ways to Fix Social Security
Conventional wisdom holds that there are only a few ways to make Social Security solvent for the long haul. You can raise taxes; cut benefits or combine the two. However, few members of Congress are willing to risk their careers by doing any of those things.
President Ronald Reagan authored a reform plan that cut benefits and implemented a tax on Social Security income for the first time. He also gradually raised the age for full benefits from 65 to 67. That kicked the can down the road to where we are today.
At the time Reagan established his Commission on Social Security headed by Alan Greenspan, another idea surfaced. That idea was to put some Social Security funds in private investments such as the stock market.
The investments would be made by individuals in personal retirement accounts or by the Social Security Administration. The problem with that idea is market risk.
Another solution calls for the implementation of an affluence test. The idea would reduce benefits for retirees with incomes over a certain amount – say, $50,000 a year. This would change the program from a benefit for all to one targeting those with the greatest need.
Still, another idea that may be the most politically palpable for Congress is to pile the Social Security shortfall onto the national debt. This would entail the trusts borrowing from the government or the government giving money to the trusts. That would effectively eliminate the Social Security problem, but it would add to the country’s debt problem.
In the words of the late Senator Evertt Dirksen, “A billion here, a billion there and pretty soon you’re talking about real money.”
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