Can the US economy grow its way out of the Social Security deficit?
For the first time in four decades, Social Security will pay more benefits this year than it collects in tax and interest revenue. The last time that happened was just before President Reagan signed 1983 legislation raising Social Security payroll taxes and cutting retirement benefits to keep the program solvent.
Benefit payments will continue to outstrip revenue until Social Security’s trust fund runs out of money in 2034. When that happens, the program will be able to pay only 79 percent of scheduled benefits.
Social Security’s trustees revealed these projections in their latest annual report, released Tuesday with Medicare’s annual report. Despite the ominous forecast, Treasury secretary Steven Mnuchin, one of the trustees, expressed optimism about Social Security’s future. “The administration’s economic agenda—tax cuts, regulatory reform, and improved trade agreements—will generate the long-term growth needed to help secure these programs and lead them to a more stable path,” he said after the reports were released.
But the millions of Americans who will eventually rely on Social Security’s retirement and disability benefits should be more concerned. Our projections show that economic growth alone can’t solve Social Security’s financing problems.
How economic growth affects Social Security’s finances
Two years ago, our colleague Karen Smith used DYNASIM, the Urban Institute’s Dynamic Simulation of Income Model, to project how economic growth would affect Social Security’s finances. She found that if real economic growth averaged 3.4 percent a year, instead of the 2.1 percent annual growth rate the Social Security trustees assume, the system could pay full benefits for an additional three decades.
But those financial gains won’t last. Strong economic growth generates a lot of tax revenue for Social Security right away without immediately changing benefits. Over time, however, economic growth puts the system on the hook for higher benefit payments. As the economy grows faster and people earn more, they eventually receive more Social Security benefits once they retire. Consequently, higher economic growth today would cause Social Security’s deficit to soar in about 35 years.
How any gains from faster economic growth are distributed across the economy will affect Social Security finances. Social Security’s trustees report that revenue forecasts declined this year because the program is funded mostly by payroll taxes and because the share of economic gains going to workers recently slipped.
If economic growth disproportionately raises earnings above Social Security’s earnings and benefit base, now set at $128,400, or goes to shareholders instead of workers, the program’s finances would improve less than if most of the gains went to middle and low earners.
It’s not clear how fast the administration’s policies will propel the economy. Tax Policy Center researchers expect that the 2017 tax cut legislation will boost economic growth by less than 1 percentage point. And the administration’s immigration and trade policies could eliminate much of those benefits. Legislation to cut legal immigration in half, which President Trump has endorsed, would slow payroll tax revenue growth and raise Social Security’s unfunded future obligations by $1.5 trillion, according to Urban’s projections.
Now is the time to improve Social Security’s future
Social Security is running out of money because people are living longer than previous generations and having fewer children. Longer lives raise benefit payments, and lower fertility reduces the number of workers paying taxes that fund those benefits.
The trustees project that between 2010 and 2035, the number of workers per Social Security beneficiary will fall from 3.0 to 2.2. Reduced revenues because of the 2007–09 recession, continued increases in the share of earnings going to workers above the payroll tax cap, and large short-run tax cuts have exacerbated these demographic challenges.
This demographic squeeze will require revenue increases, benefit cuts, or some combination, not the illusory promise of faster economic growth. At Urban, we have modeled the potential impact of various reform parameters and packages on plan finances and retiree benefits.
But changing Social Security will require political leadership. Evidence shows that Social Security’s financial problems need to be addressed sooner, not later, so more generations can share the reform costs and workers can have time to adjust their employment and savings decisions in response to any benefit cuts.
Activists participate in a rally urging the expansion of Social Security benefits in front of the White House July 13, 2015 in Washington, DC. Photo by Win McNamee/Getty Images.