Written by Romina Bocca
It has been 30 years since Congress last touched Social Security. Reform is urgently needed to protect the nation’s elderly and disabled from poverty and its younger generations from an increasing and economically harmful tax burden.
Here are the top five signs that Congress should begin reforming Social Security in 2014:
Social Security has spent more than it received in taxes for each of the past four years. Social Security began running cash flow deficits in 2010, paying out $50 billion more in benefits than it received in payroll taxes. Last year, the program amassed about $75 billion in red ink. In less than 20 years, Social Security’s deficit will more than quadruple to $322 billion.
Social Security will run an average deficit of 12 percent over the next decade. According to the Congressional Budget Office (CBO), Social Security will see a 12 percent gap between the taxes it collects and the benefits it will pay out over the next 10 years—and it is slated to get worse after that. The CBO report states, “As more members of the baby-boom generation retire, outlays will increase relative to the size of the economy, whereas tax revenues will remain at an almost constant share of the economy,” which ensures that the deficit will increase at a faster rate in the near future.
While technically considered solvent, Social Security is already adding to the federal deficit. When Social Security runs a cash flow deficit, as it has done for the past four years, it dips into its trust fund (amassed from past surpluses) to pay out benefits in excess of payroll taxes collected. However, other government agencies spent the trust fund’s surpluses on other federal spending in exchange for intra-governmental IOUs that must be financed by taxing or borrowing. The process by which trust fund bonds are converted to cash through borrowing adds to the national debt. Social Security’s cash flow deficit places a significant and growing financial burden on the federal budget.
Without reform, Social Security benefits drop 23 percent by 2033. Social Security’s trust fund will run dry by 2033, according to estimates. At that point, payroll taxes and other sources of revenue will be able to pay only 77 percent of Social Security’s scheduled benefits. This scenario would hurt vulnerable seniors and those entering the program after 2033 the most.
Payroll taxes would have to rise by one-third to cover the 2033 shortfall. If Congress does not reform Social Security and instead raises taxes in 2033 to avoid the scheduled 23 percent drop in benefits, payroll taxes would increase by one-third, from 12.4 percent to 16.5 percent. In addition to raising the tax burden on work for all Americans, this would be particularly harmful to lower-income workers—those most likely to suffer job losses when government raises the cost of labor.
The need for Social Security reform grows more urgent with each passing year. Congress should begin the process of reform in 2014 by implementing three commonsense and bipartisan reforms:
Implement a more appropriate cost-of-living adjustment known as Chained Consumer Price Index, which improves accuracy and limits excess spending on benefits;
Raise the retirement age gradually and predictably to more accurately reflect the increase in life expectancy; and
Phase out benefits for Americans with high levels of non–Social Security income and target Social Security toward those seniors who truly need the benefit payments.
After three decades of neglect, Congress should act and reform Social Security to preserve the promise to protect the elderly from poverty and to protect younger generations from higher taxes.