Social Security Trustees Report: Action Needed to Avoid Looming Benefit Cuts

The 2023 Social Security Trustees’ Report underscores a fact we have known for decades: Social Security’s finances are on an unsustainable path. Unless Congress acts, the program’s primary trust fund—the old-age and survivors insurance (OASI) trust fund—will only be able to pay full scheduled benefits until 2033, as shown in Figures 1-3. Since 2012, the trustees have consistently projected trust fund depletion between 2032 and 2035, highlighting the harsh reality that Congressional inaction means allowing an across-the-board cut of nearly 25% of all monthly benefit payments in just over a decade.

Figure 1: The Looming Benefit Cliff

Social Security is the foundation on which most Americans build their retirement. It pays benefits to retirees, their families, and people with disabilities, lifting millions out of poverty each year. Even so, on top of its financial challenges, the program’s tax and benefit structure is outdated, disincentivizing workforce participation while failing to provide adequate financial security to those who rely most on the program.

But restoring Social Security’s fiscal health and enhancing benefits for vulnerable beneficiaries are not mutually exclusive goals. In fact, tackling them together is the best way to ensure the program can adequately support future generations and attract the necessary bipartisan support for Social Security reform.

For several decades after policymakers last reformed Social Security in 1983, the program’s income exceeded its expenses, generating large trust fund surpluses. In recent years, however, annual benefit payments began to surpass income.

Figure 2: Social Security’s OASI Trust Fund to Be Depleted in 2033

Figure 3: Social Security’s Shortfall Continues to Grow

One big reason is demographics. The ratio of workers paying Social Security payroll taxes to people drawing benefits has dropped from four-to-one in 1965 to just under three-to-one in 2022. As shown in Figure 4, that ratio is projected to drop to less than 2.5-to-one by 2030 as baby boomers continue to retire, people live longer, and working lives have not proportionally increased.

Figure 4: The Worker-to-Beneficiary Ratio Continues to Decline

At the same time, Social Security’s tax base is shrinking as a share of national earnings. Social Security’s payroll tax, which covered 90% of total earnings in 1983, is projected to cover just 80% this year, as shown in Figure 5. This trend largely stems from growing income inequality: around 6% of workers have earned more than the taxable maximum ($160,200 in 2023) for four decades, but the labor income of those top earners has grown much faster than that of lower earners, placing more earnings above the taxable cap.

Figure 5: Social Security’s Shrinking Tax Base

In 2016, a Bipartisan Policy Center commission recommended steps to make Social Security solvent and modern. Among other reforms, the commission proposed:

• Restructuring the benefit formula to increase progressivity and better reward continued work
• Establishing a new minimum benefit to help those with low lifetime earnings and reduce elder poverty
• Increasing the retirement age gradually to reflect increases in U.S. life expectancy
• Bringing in more revenue, partially by restoring the taxable base to its prior level as a share of total earnings

Taken together, these provisions could strengthen program benefits and solvency alike. Once fully phased in, average households in the bottom 40% of earners would collect higher benefits, while middle earners would see benefits around currently scheduled levels. Nearly all benefit savings would come from those in the top 40% in lifetime earnings, but just about everyone would be better off than if Congress fails to act.

The commission recommended this balanced approach seven years ago though, and Social Security’s challenges have since grown while the time to address them has shrunk. To restore long-term solvency now, policymakers will have to phase in larger changes at a faster pace—or perhaps more realistically, turn to some type of temporary borrowing as part of the solution.

The success of any effort to solve this problem will depend on the willingness of policymakers and the public to rise above the current political rhetoric filled with unproductive absolutes (“No tax increases!” “No benefit cuts!”). Policymakers can shore up Social Security’s finances and strengthen the program for future generations, but to do so, they must come together, engage across the aisle in good faith, and compromise.