As a condition of providing extra funds to support the existing benefit, legislators should let younger workers opt for a better-focused safety net. In his 2024 budget proposal, President Biden promised to oppose any cuts to Social Security — pledging to defend the current structure of the program. The past four decades have seen enormous changes to America's economy, society, and public policy, but Social Security has remained essentially unaltered.
That is not because the program is performing particularly well. It costs twice as much as public-pension systems in Australia and Canada but leaves the poverty rate among American seniors significantly higher. Most of the program's expenditure goes to relatively affluent seniors and has little effect other than to push up taxes, reduce incentives to work, and crowd out private savings for retirement.
Politics currently makes Social Security hard to reform, but reform will be unavoidable beyond 2034, when it is set to run out of dedicated revenues, at which point an automatic across-the-board reduction of benefits is set to apply. As a condition of providing extra funds to support the existing benefit, legislators should let younger workers opt for a better-focused safety net: uniform benefits regardless of income in return for lower payroll taxes.
Social Security currently pays benefits to workers in retirement and their surviving dependents, funded by a dedicated 12.4 percent payroll tax on the first $160,200 of earnings. But the ratio of contributing workers to beneficiaries will fall from five to one in 1960 to two to one in 2040, due to rising longevity and declining birth rates. Since 2009, the program has paid out more in benefits every year than the revenues it has taken in, and by 2034 its trust fund will be entirely depleted.
The program operates mostly on a pay-as-you-go basis, with today's workers paying for current retirees. Redistribution between generations is substantial: Retirees born pre-1900 received $12 for every $1 they paid in; those born in the 1950s receive only 70 cents. The later you are born, the more likely you are to lose out. Within generations, the program redistributes to those with longer lifespans and to households with non-working spouses, but on balance does not significantly redistribute to poorer seniors.
Even though the United States spent much more on Social Security ($4,919 per capita) than Australia ($2,232) or Canada ($2,500) spent on their public-pension programs in 2017, the poorest decile of its senior population had significantly lower incomes ($12,431, vs. $15,482 and $18,937, respectively).
The program's misaligned focus imposes needless costs. Its payroll taxes are the largest federal tax paid by nine out of ten Americans and serve to reduce labor supply by workers at all income levels. The structure of benefits serves to hasten retirement, while the provision of more generous benefits to high earners serves to substantially reduce private provision for retirement — with crowd-out concentrated among those who have the greatest capacity to save and invest.
Social Security has proven difficult to reform. The Senate's Byrd Rule stipulates that the program cannot be altered through the budget-reconciliation process — and so bipartisan agreement is necessary for any change to it. Whereas Congress has regularly enacted bipartisan legislation trimming Medicare by cutting payments to medical providers, the growth of Social Security payments cannot be slowed without visibly reducing benefit levels to which individuals are entitled.
The existence of a dedicated trust fund means that the program will remain exempt from the fiscal scrutiny to which most other federal expenditures are subject every year. Yet, once this runs out, the Social Security Administration would be authorized to pay only 80 percent of scheduled benefits. That flips the politics: Bipartisan action to reform the program would be required to keep paying benefits as promised past 2034.
It therefore makes sense to reconsider the purposes of Social Security, and how the program can best be structured to achieve them beyond 2034.
President George W. Bush advocated allowing workers to shift some of their Social Security payroll-tax contributions into private retirement accounts. Yet, the need to also pay benefits to existing retirees, who hadn't accumulated such savings, would have remained. The arrangement would also have established public responsibility for regulating investments made through those accounts. The so-called privatization would have therefore greatly expanded federal regulation of mutual funds, while slightly increasing federal spending on the program from 2020 to 2060.
A better approach would be to allow workers under the age of 45 to opt for a uniform $17,000 benefit (indexed for inflation) from Social Security in retirement, regardless of previous earnings — in return for a five-percentage-point payroll-tax cut during the remainder of their working career. That would cut the cost of the program, reduce its crowd-out of private savings by higher earners, and improve its effectiveness at reducing elderly poverty.
If packaged with a three-percentage-point increase to tax rates, which Social Security's actuaries deem necessary to replenish the trust fund, such a reform might facilitate bipartisan agreement: allowing Democrats to claim that they had restored the solvency of the current system without cutting benefits, and Republicans to argue that taxes were cut by 2 percent on net for those who wished them to be.
Chris Pope is a senior fellow at the Manhattan Institute.