Too many retirees; too little money

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Retirees are living longer and collecting more Social Security. In its annual report released today, the Congressional Budget Office, or CBO, says it’s only going to get worse.

In 2010, Social Security for the first time spent more than it took in. By 2014, payments exceeded revenues by 9 percent. By 2025, benefits paid will exceed payroll taxes by 30 percent, and by 2040, assuming there are no changes, benefits will exceed revenues by 40 percent.

That’s a budgeting problem that any of us can understand, and the reasons behind it are also pretty simple.

Too few young workers. The CBO says the number of people who are age 65 or older will increase 37 percent by 2025, and 76 percent by 2040. Meanwhile, the CBO projects a much smaller increase in 20- to 64-year-olds — only 4 percent by 2025 and 10 percent by 2040.

Some people are living much longer. The CBO says that people with higher incomes — who collect the most Social Security — will live longer than the people who earn the lowest incomes and collect the least. On average by 2040, men in households with high lifetime earnings will live more than five years longer than men in households with low lifetime earnings, and women in households with high earnings will live almost three years longer than women in households with low earnings.

These factors added together mean spending for Social Security will rise from 4.9 percent of gross domestic product, or GDP, in 2015 to 6.2 percent by 2040, the CBO estimates. The shortfall over the next 75 years amounts to 4.4 percent more than the government is expected to collect in taxes — all other things being equal — the CBO estimates.

Some solutions

The CBO figures that the problem could be fixed through 2089 by one of these three approaches:

  • Raise payroll taxes immediately and permanently by 4.4 percent of taxable payroll. In other words, if worker and employer shares of payroll taxes each rose by 2.2 percent, that would do it.
  • Reduce benefits by 4.4 percent. That would fix it, too, but most people probably wouldn’t like the idea. However, we might think about how to equalize the amount those long-lived, high-earners receive.
  • Some combination of tax increases and benefit reductions.

One easy way to raise revenue, the CBO points out, is to increase the amount of earnings on which Social Security payroll taxes are levied. Growth in income for high-earners has outpaced the growth in income earned by workers with modest incomes, so the portion of earnings on which payroll taxes are paid has fallen from 90 percent in 1983 to 81 percent in 2015. The CBO says it will keep falling to 79 percent by 2025. In 2015, income on which payroll taxes is collected is capped at $118,500. If we raised the portion of earnings on which Social Security taxes are paid back to 90 percent, we’d make much of the shortfall go away.

We all have heard everything that is in this report many times over, but so far it has resulted in lots of  talk but no action. Here is how other experts would fix Social Security.

If you were in charge, how would you fix it and when would you do it?


Follow me on twitter @jennielp.