Which Path to Social Security Solvency?

John Iekel

The solvency of Social Security is not a new concern. It’s been on a slow—or, at times, high—burn for more than 40 years. Proposals to address the problem are almost as numerous as the warnings about it; in a recent report, the Congressional Research Service takes a look at the potential impact of some steps that could be taken. 

In “Social Security: Estimated Impact of Hypothetical Solvency Measures,” Barry F. Huston, Analyst Social Policy, Sarah A. Donovan, Specialist in Labor Policy, and Anthony A. Cilluffo Analyst in Public Finance, all of the Congressional Research Service, look at proposals to restore the vigor and vitality of the system. 

“Many proposals are typically put forth in each Congress to address the program’s projected financial shortfall,” Huston, Donovan, and Cilluffo note, continuing that some seek to do that by reducing costs—that is, cutting benefits—while others aim to achieve that by raising revenues, for example, through increased payroll taxes. Still other proposals, they say, incorporate both cost-reducing and revenue-increasing provisions. 

Tick, Tock 

The researchers note that the Social Security Board of Trustees warn in their 2023 annual report that there is just a decade left to pay scheduled benefits in full, at least under current law. 

In that report, the trustees said that Social Security continues to face “significant financing issues,” and that projected hypothetical combined Old-Age and Survivors Insurance and Disability Insurance (OASDI) Trust Fund asset reserves will be depleted and unable to pay scheduled benefits in full on a timely basis in 2034. 

After that, income continuing to come in to the OASDI trust funds would be sufficient to pay 80% of scheduled benefits. Not surprisingly, the trustees say that the magnitude of the changes that solvency would require increase as time passes.

To help illustrate the magnitude of the projected financial shortfall, Huston, Donovan, and Cilluffo note, the trustees provide four hypothetical scenarios—each using 2023 as a starting point—that would maintain the trust funds’ solvency (defined as the ability to pay full benefits scheduled under current law on time). 

The trio examine the potential effects of these hypothetical changes to Social Security benefits and the payroll tax rate for very low, low, medium, high, and maximum lifetime hypothetical earners—as developed by the Social Security Administration—for those born in 1960, 1980, 2000, and 2020. 

Social Security Payroll Taxes 

The Social Security payroll tax applies only to wages paid up to the Social Security wage base limit for the year, adjusted annually for the growth in average wages. The employee portion of the Social Security tax is directly withheld from wages paid to an employee. Employers deposit that portion, as well as the portion the employer itself contributes, with the government.

Social Security is funded by a 6.2% tax on covered wages, imposed on both employees and employers, for a combined total of 12.4%. The self-employed pay 12.4% of their net self-employment earnings (business earnings minus all legal deductions, such as the cost of goods sold) toward Social Security as part of their self-employment taxes. Social Security payroll tax rates have largely remained the same since 1990.

Immediate Tax Hike. One hypothetical change that could help the trust funds’ solvency is increasing the payroll taxes immediately. The trustees estimate that fulfilling all scheduled benefits payments throughout the 75-year projection period would require an immediate increase in the payroll tax rate of 3.44 percentage points—from 12.4% of covered earnings to 15.84% of covered earnings. That translates to a combined Social Security payroll tax rate jump of approximately 28%. This, they say, would require congressional action.  

Delayed Tax Hike. Another possible change could be to increase payroll taxes, but delay that hike. If change in the payroll tax was delayed and it was implemented at the time the trust fund is projected to be depleted—that is, in 2034—the increase would need to be 4.15 percentage points. That would translate to an increase in the combined payroll tax rate from 12.4% of covered earnings to 16.55%—a jump of approximately 33%. As with an immediate tax increase, congressional action would be necessary in order for this to happen. 

Scheduled Benefits

The computation process by which Social Security benefits are determined involves four main steps. 

• First, a summarized measure of lifetime Social Security–covered earnings—called average indexed monthly earnings (AIME)—is computed. 
• Second, a progressive benefit formula is applied to the AIME to compute the primary insurance amount (PIA).
• Third, an adjustment may be made based on the age at which a beneficiary chooses to begin receiving benefits.
• Fourth, a cost-of-living-adjustment (COLA) is applied to the benefit beginning in the second year of eligibility, which for retired workers is age 63.

Two additional hypothetical actions that could be taken to make the trust funds solvent entail cutting benefits. 

Immediate Benefit Cuts. One of the consequences of scheduled revenues remaining unchanged would be that to maintain trust fund solvency, an immediate 21.3% benefit cut would have to be applied to all current and future beneficiaries. This, too, would require congressional action. 

Delayed Benefit Cuts. If benefits were not cut until 2034, when trust funds are projected to be depleted, maintaining their solvency would require a hefty 25% cut in benefits. Unlike the other three hypothetical actions, however, this would not require congressional action.

Or, Mix it Up

There are more options than just those four, the trustees say: it also would be possible to take a combination of actions to maintain the trust funds’ solvency. To wit: it would be possible to pursue a smaller tax hike and a smaller benefit cut. 

The Bottom Line 

Huston, Donovan, and Cilluffo write that the hypothetical steps would affect different demographic groups in different ways. 

They say that an immediate payroll tax rate hike would have a relatively smaller impact on current beneficiaries or those close to claiming benefits, sincethey are less likely to be subject to the higher payroll taxes. A delayed payroll tax rate increase, the researchers say, would effectively shift a higher additional payroll tax burden onto younger workers.

An immediate benefit reduction, they say, would affect all current and future beneficiaries; however, a delayed benefit reduction would have no effect on many current beneficiaries.

Finding out More 

The report “Social Security: Estimated Impact of Hypothetical Solvency Measures” is available here: https://crsreports.congress.gov/product/pdf/R/R47924

The report “The 2023 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds,” is available here: https://www.ssa.gov/oact/TR/2023/tr2023.pdf

A fact sheet about the 2023 Social Security and Medicare Trustees Reports is available here: https://home.treasury.gov/system/files/136/TR-2023-Fact-Sheet.pdf