NCPA - National Center for Policy Analysis

Restoring Solvency to Social Security

September 25, 2015

August 14, 2015 marked the 80th anniversary of the signing of the Social Security Act by President Franklin Roosevelt in 1935. The program has done much to alleviate poverty among the elderly. Unfortunately, the system itself is showing its age.

The system's ills have been driven in part by demographics, as the number of workers per retiree has been falling for decades due to reduced birth rates and rising longevity. When the system was young, there were many workers paying into the system for each person drawing benefits.

  • The Social Security Trust Fund's shortfall is driven partly by the formula that determines benefits for each retiree.
  • Under the current "wage indexing" formula, benefits are projected to climb by more than 150 percent in real terms (over and above inflation) over the next 75 years.
  • To maintain this kind of benefit growth under current law and balance the Social Security Retirement and Disability Trust Fund, payroll taxes would have to increase by 38 percent, from the current 12.4 percent to 17 percent.
  • An alternative to raising payroll taxes to balance the Trust Fund is to trim the growth of future benefits by simply switching from wage indexing of benefits to price indexing.

Had Congress chosen price indexing in 1977 or 1983, and added the rise in the normal retirement age that was enacted in 1983, the OASI system would be living within its means today. We would now be in a situation where the payroll tax could be cut, or some of it transferred to cover a portion of the Medicare program.

We have paid a stiff penalty by waiting nearly 40 years to adopt price indexing. Without price indexing or some other trimming of the growth of benefits, there can be no permanent fix to the program without substantial loss of jobs and income.

Source: Stephen J. Entin, "A Simple Change to Restore Social Security Solvency," Tax Foundation, September 8, 2015.

 

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