How the Next President Could Save Social Security

By Dave MerrillDave Merrill and Chloe WhiteakerChloe Whiteaker
October 26, 2016

According to the latest estimates, Social Security will begin to run short of money in 18 years. Yet, the issue has barely come up this election year. In a brief exchange during the final debate, Donald Trump said a growing economy would be enough to save the program1. Hillary Clinton proposed raising taxes on the wealthy and increasing some benefits. Neither candidate outlined a solvency plan. It’s no surprise that just one in three millennials believes Social Security will be around when they retire, according to Pew Research. There are several ways to replenish the program—some more painful than others. The sooner the problem is addressed, the less costly it will be to fix.

The problem
Since 2010, Social Security’s funding mechanism has been taking on water. The number of workers supporting a growing number of retiring baby boomers is not sufficient to pay all the benefits they are due.
‘Trust fund’ draw down
Since there are not enough payroll taxes being collected day-to-day, money is drawn from Social Security’s “trust fund” reserve to meet the shortfall. The $2.8 trillion reserve grew out of payroll tax increases initiated in 1984.
Reserve depletion, 2034
When the trust fund reserves are depleted in 2034, retirees will collect only what the workers’ payroll taxes can provide: about 79 percent of benefits. So, for example, instead of an annual $18,000 benefit, a retiree would receive $14,220.
What to do?
It is unlikely that a future Congress or president will let benefits suddenly drop off like this. The question is when and by what means the system will get fixed.
How about adding workers by increasing immigration levels?
Annual immigration would need to nearly quadruple. It’s unlikely Congress would make such radical changes to immigration laws.
Could we add workers by having more children?
If women in the U.S. had an average 4.2 children, it would eventually bring long-term solvency to the Social Security system. Unfortunately, this country hasn’t had a fertility rate that high since the 1880s.
How about investing trust fund assets in the stock market?
If the U.S. invested 40 percent of the trust fund’s assets in the stock market, it would take an average 20.2 percent return over 75 years to attain long-term solvency. Historically, the Dow’s annual return is 7.6 percent
Could we raise the retirement age a little bit?
It would need to go up a lot. A full retirement age of 75 would be needed to extend Social Security for 75 years.
What else could be done?
We could raise the payroll tax rate 2.58 percentage points, from 12.4 percent to 14.98 percent ...
... or reduce benefits
Either approach would work, though it’s doubtful that the American public would accept such jarring changes.
A better way
Instead of enacting one big, draconian change to save Social Security, the president and congress could restore solvency to the system by combining several smaller, less painful fixes. Actuaries at the Social Security Administration have analyzed more than 100 individual policy provisions and provided estimates of the financial effect of each on the long-range solvency problem. While simply adding the financial effect of one provision to another does not give an exact measure of a combined proposal, it can give a back-of-the-envelope estimate of the size and scope of the provisions needed to keep Social Security afloat for at least 75 years.
Pick two
For example, adding together any two of these potent provisions eliminates the shortfall, with some left over to replenish the trust fund.
Pick three
Any three of these milder provisions would also get the job done.
Pick five
Gradually adding together five smaller provisions would be easier on seniors, future retirees, and the economy.
A balanced approach has worked before
In 1983, when Congress and President Ronald Reagan last tackled Social Security’s difficulties, the combination of several changes—including raising the retirement age, gradual tax increases, and cost-of-living adjustments—remedied the system. A similar plan could be crafted today, one that inflicts only modest pain on each side of the political aisle. Every year that elected officials delay, the less effective the remedies become. There will be ever-fewer workers to share the burden and more retirees counting on a level of benefits that can’t be sustained.