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Fixing Social Security

Should We Shrink the Program or Expand It?

December 2, 2020

With the election decided, president-elect Joe Biden and the new Congress may be ready to confront Social Security’s long-term financing gap. During the campaign, Biden proposed expanding Social Security benefits and forcing high earners to contribute more, but his plan would not make Social Security solvent over the next 75 years.

Two competing Congressional proposals illustrate opposing strategies for eliminating the program’s long-term financing gap. A plan from Representative John Larson (D-CT) achieves solvency by raising revenue; former representative Sam Johnson (R-TX) gets there by cutting costs.

How would these proposals affect workers, beneficiaries, and the program’s finances? To find out, we use DYNASIM4, the Urban Institute’s dynamic microsimulation model, to project the effects of both plans over the next seven decades.

How Larson and Johnson plan to close Social Security’s financing gap

The Social Security’s trustees’ latest projections indicate that annual revenues will fall short of annual costs next year and never recover. The program’s trust fund can cover the shortfall for a while, but it will run out in about 15 years. The economic downturn that followed the COVID-19 pandemic will likely accelerate that schedule.

In January 2019, to close this financing gap, Representative Larson introduced the Social Security 2100 Act, which would expand Social Security. His proposal would raise benefits across the board, increase cost-of-living adjustments, expand the minimum benefit, boost the payroll tax rate, gradually eliminate the cap on earnings subject to the payroll tax, and increase the income threshold for paying taxes on benefits.

Larson’s plan is a contrast to a bill that former representative Johnson introduced when he was in Congress, the Social Security Reform Act of 2016, which would shrink Social Security. His proposal would raise the retirement age, reduce benefits for high earners, lower cost-of-living adjustments, limit benefits for higher-income spouses and children of beneficiaries, raise the minimum benefit, eliminate taxes on benefits, and boost payments for long-term beneficiaries. Although Johnson’s bill is no longer active, it is the most prominent recent Republican proposal and illustrates well a competing approach.

To better understand the effects of both proposals, we compare them with each other and with two different scenarios: what Social Security can now afford to pay and what Social Security is promising to pay.

The “payable benefits” scenario shows what would happen if policymakers do nothing. The trust fund would run out in the mid-2030s, Social Security tax rates would stay the same, and benefits would fall after the trust fund runs out.
The “promised benefits” scenario would continue to make payments under the current benefit formula indefinitely, even if Social Security lacked sufficient revenues to pay for them.

Our estimates use economic assumptions that predate the COVID-19 pandemic, so our projections may understate Social Security’s financial shortfall.

How Might Annual Social Security Benefits Change?

The Larson proposal would substantially increase annual Social Security benefits. In 2050, the median annual Social Security benefit would reach $21,600 (in inflation-adjusted 2018 dollars) under the Larson proposal, 34 percent more than what the system could pay under current tax rates and 5 percent more than what the current benefit formula would provide if adequate funds were available.

The Johnson proposal, in contrast, would reduce Social Security benefits. In 2050, the median Social Security benefit would be $15,500, 28 percent less than under the Larson proposal, 4 percent less than under the payable benefits scenario, and 24 percent less than under the promised benefits scenario.

Between 2020 and 2050, the median annual benefit, measured in inflation-adjusted dollars, increases 31 percent under the Larson proposal and falls 3 percent under the Johnson proposal.

How Might Annual Social Security Payroll Taxes Change?

Social Security is mostly financed by a payroll tax of 12.4 percent on earnings below an annual threshold, split between employees and their employers. That threshold, $137,700 in 2020, increases over time with the growth in the national average wage.

The Larson proposal would finance the higher benefits it provides by increasing the Social Security payroll tax rate and raising the cap on earnings subject to payroll taxes. In 2050, the median annual payroll tax, split between employees and employers, would reach $8,600 in inflation-adjusted dollars, 18 percent more than under current law. Larson’s gradual elimination of the payroll tax cap would increase payroll taxes much more for high-wage earners.

The Johnson proposal does not change payroll taxes.

How Might Lifetime Social Security Benefits Change?

Social Security’s progressive benefit formula replaces a larger share of earnings for low-wage workers than for high-wage workers. Under current law, however, lifetime Social Security benefits for low-wage workers as a share of lifetime earnings will fall over time, especially for people born after 1970, because the trust fund will have run out before or just around the time they retire. Lifetime benefits relative to earnings will not change much for moderate- and high-wage workers, because longevity gains for these groups will largely offset benefit cuts. Our projections do not show the same gains in life expectancy for low-income workers.

The Larson proposal would raise lifetime benefits for all earning groups, especially beneficiaries with limited earnings. For the bottom fifth of earners born in the 1990s, lifetime benefits relative to earnings would be about 50 percent higher under the Larson proposal than what could be paid under current law.

The Johnson proposal would also raise lifetime benefits relative to earnings for low-wage workers but by only about one-third as much. The Johnson proposal would cut benefits for high-wage earners.

How Might Lifetime Social Security Taxes Change?

Workers with low and moderate lifetime earnings pay an average of 12 percent toward Social Security taxes. This is slightly below the 12.4 percent payroll tax rate because some beneficiaries spend time in jobs that are not covered by Social Security.

Workers with high lifetime earnings have a lower average tax rate because some of their earnings exceed Social Security’s taxable maximum and thus are not taxable. Average rates are especially low for high-wage workers born in the 1980s and beyond because we project that strong future earnings growth for high-wage workers will push more of their earnings above the taxable maximum.

The Larson proposal would raise Social Security taxes for all earnings groups, especially high-wage workers. The impact would increase with each successive birth cohort as more of their earnings become subject to the proposal’s higher tax rate and the taxable maximum gradually disappears.

The Johnson proposal would not change Social Security payroll taxes.

How Much Would Beneficiaries Get for Their Taxes?

Under current law, people born in the 1950s who earn moderate wages over their lifetime can expect to receive 86 cents for every dollar they pay in Social Security taxes. Because of the system’s progressive benefit structure, those with low lifetime earnings can expect to receive $1.39 in benefits for every dollar in taxes; those with high lifetime earnings can expect to receive only 64 cents. Because Social Security insures people against economic hardship if they receive low lifetime earnings or develop disabilities, people whose taxes exceed their payments still benefit from that protection provided by the program.

Later generations will receive less because we assume that Social Security benefits will be cut when the trust fund runs out. Also, because payment thresholds are not indexed for inflation, larger shares of beneficiaries have to pay federal income tax on their benefits every year.

The Larson proposal would substantially increase benefits received for every tax dollar paid, especially for beneficiaries with limited lifetime earnings. However, the gains fall for later generations as tax increases fully phase in. The Johnson proposal would raise the benefits-to-tax ratio for beneficiaries with low lifetime earnings but reduce it for those with high lifetime earnings. Among beneficiaries born in the 1990s, those in the top fifth of the lifetime earnings distribution would average only 40 cents in benefits for every dollar of taxes paid.

How Might Economic Hardship Change?

The share of Social Security beneficiaries with incomes below the federal poverty level is slowly declining as productivity growth raises earnings and subsequent retirement incomes. But if federal policymakers allow the system’s trust fund to run out, the poverty rate for beneficiaries will spike in about 15 years. By 2050, though, economic growth will reduce the poverty rate for Social Security beneficiaries below its current level.

Under the Larson proposal, the poverty rate for Social Security beneficiaries would fall even further.

Without reform, many Social Security beneficiaries will fall behind working Americans. The share with incomes below 25 percent of average earnings will double over the next 25 years if the Social Security trust fund runs out, and it will continue to rise afterwards. Even under the Larson proposal, which significantly expands Social Security, the share of beneficiaries experiencing hardship under this measure would grow over time.

How Might Social Security Revenues and Costs Change?

The Larson and Johnson proposals would both close the gap between Social Security’s costs and revenues, but the Larson proposal would do so by raising revenues while the Johnson proposal would cut costs. Under the Larson proposal, Social Security revenues in 2080 would grow to 6.3 percent of gross domestic product, up from a projected 4.5 percent under the payable benefits scenario, a 40 percent increase. The Larson proposal would also increase system costs.

The Johnson proposal would shrink Social Security by about one-third. System costs would fall to 4.0 percent of gross domestic product, compared with 5.9 percent under the promised-benefits scenario. The Johnson proposal would also reduce Social Security revenues by excluding all Social Security benefits from the federal income tax.

How Might the Social Security Trust Fund Change?

Under both the Larson and Johnson proposals, the combined Social Security trust fund, which finances the old-age and survivor insurance program and the disability insurance program, would be fully solvent over the next 75 years, meaning that the system could pay all promised benefits over the period.

In 2090, the trust fund would be slightly larger under the Johnson proposal than under the Larson proposal. By contrast, we project that under current law the trust fund will run out in 2037.

Why Reform Matters

Social Security provides cash benefits to more than 64 million retirees and people with disabilities and their spouses, dependents, and survivors. Ensuring Social Security’s financial stability is critical for the millions who rely on this program now and the millions counting on benefits in the future.

ABOUT

For more information about this analysis, read our related report .

The Urban Institute’s Dynamic Simulation of Income Model (DYNASIM) projects the size and characteristics—such as financial, health, and disability status—of the US population for the next 75 years. Using the best and most recent data available, it helps sort out how the profound social, economic, and demographic shifts that are transforming retirement will likely affect older adults, taxpayers, business, and government. The model can also show how outcomes would likely evolve under changes to public policies, business practices, or individual behaviors.

PROJECT CREDITS

This feature was funded by the Alfred P. Sloan Foundation. We are grateful to them and to all our funders, who make it possible for Urban to advance its mission. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders. Funders do not determine research findings or the insights and recommendations of our experts.

RESEARCH

Karen E. Smith, Damir Cosic, Aaron R. Williams, and Richard W. Johnson.

DESIGN

Christina Baird

DEVELOPMENT

Aaron R. Williams, Ben Chartoff, and Jerry Ta

EDITING

Serena Lei and Michael Marazzi