Eight Years to Fix Social Security
Policymakers must stop kicking the entitlement program can down the road
There is a line in Ernest Hemingway’s The Sun Also Rises where a character is asked how he went bankrupt. “Two ways,” he replies. “Gradually, then suddenly.” It’s the perfect epitaph for America’s entitlement crisis.
According to the Social Security Administration’s newly released “Trustees Report,” the retirement trust fund — the pool from which benefits are paid — is set to be depleted in 2033. When that day comes, retirees will see a mandatory 23% cut in their checks, regardless of income, need, or political promises made on the campaign trail. The rapidly depleting trust fund is partly due to the misnamed Social Security Fairness Act, which increases benefits to state employees with already generous pensions. Medicare's hospital insurance trust fund will also dry up in 2033, with an 11% cut to payments for seniors.
We’ve known for years that the system is paying out more than it collects. That’s what happens when you design a pay-as-you-go pension scheme in a country with falling birth rates, rising life expectancy, and a Congress that treats long-term actuarial projections like unread user agreements.
And yet, Washington remains in a state of wilful paralysis. Former President Biden pledged never to touch a penny of Social Security. President Trump has promised the same. Neither party wants to face the fact that if nothing is done, today’s 59-year-olds will reach full retirement age just in time to receive a quarter less than what they’ve been promised.
Some pretend the problem is fraud. It isn’t. As my colleague Charles Blahous, former public trustee of Social Security, has shown repeatedly, improper payments are minimal. Because the program is simple and nearly universal, there’s little opportunity for fraud in the first place. But waste? That’s another matter.
Consider the benefit formula. Social Security calculates retirement payouts based on a worker’s highest 35 years of earnings. But it treats someone who earned $150,000 a year for ten years exactly the same as someone who earned $50,000 for thirty years. The result is an unintended windfall for intermittent high earners who are mistakenly classified as “low income.” Blahous proposes extending the calculation period to 40 years, or better yet, averaging over all working years. This simple reform would both reward long-term work and correct unjustified disparities.
Then there’s the nonworking spouse benefit. Originally designed to recognize the economic value of stay-at-home labor, it now functions as a regressive transfer from poorer workers to wealthier households. A millionaire’s spouse with no work history can receive more in benefits than a minimum-wage worker who paid payroll taxes for decades. Reforming or even capping this benefit would help close some of the long-term funding gap.
Another fix lies in adjusting how benefits grow. Currently, Social Security benefits are indexed to wages, not prices. This means that benefits rise faster than inflation, even as Americans live longer and collect checks for more years. Many economists recommend switching to a more accurate measure, chained CPI, which reflects changes in consumer behavior and grows more slowly. This would slow the program’s cost growth without reducing real benefits.
Perhaps the most important change is the most politically difficult: raising the retirement age. When Social Security was created in 1935, life expectancy was 61. Today, it’s 77. Yet the full retirement age has only crept up to 67, while Americans can still begin claiming benefits at 62. Even the left-leaning Brookings Institution recommends raising the full retirement age to 70 over time. This would not affect when Americans can retire — it would simply adjust the size of their benefit to reflect longer lifespans.
And yes, we should consider means-testing benefits. As my colleague Veronique de Rugy has argued, there is no economic or moral case for taxing younger, poorer workers to subsidize affluent retirees. A cap on monthly benefits of $2,050, as economists Andrew Biggs and Kristin Shapiro have proposed, would protect the half of retirees who truly depend on Social Security, while gradually scaling down payments for the wealthy. The alternative is a universal 23% cut for everyone, rich and poor alike.
Critics will argue that any of these reforms amount to “cutting benefits.” But if we do nothing, all benefits will be cut by law, and indiscriminately. Reform is the only way to prevent real, across-the-board pain. And it is precisely the flexibility of reform that allows us to protect the most vulnerable while moderating payouts for those who can afford it.
For decades, the political consensus has been to kick the can down the road. Now we’re arriving at the end of that road. The shortfall is projected to be 3.82% of taxable payroll over 75 years, or $25.1 trillion. Fixing it requires either dramatic tax hikes, sweeping benefit cuts, or a combination of smart, structural reforms. We still have some time for the third option, but the clock is ticking.
Social Security was born in the shadow of the Great Depression, when old age and poverty were nearly synonymous. Today, seniors are wealthier than younger generations, yet we’re taxing working families to subsidize every retiree, regardless of need. If lawmakers won’t act, the law will.