I graduated from college in 1982. Social Security was broke at that point, with promised payments exceeding incoming revenues. Since the system was “fixed” in 1983, the trajectory has been clear to me. I would pay into the system my entire working life, first to support those who were already retired or soon-to-retire in the 1980s, but also to build up a “trust fund” that would help to finance benefits for those retiring in the early 2000s. But then, just about when I reached retirement age, despite my lifetime of payments, Social Security would again be broke, with promised payments exceeding the projected incoming revenues by about $29 trillion over the next 75 years, according to the actuaries.
In a just and righteous universe, politicians would have their feet held to the fire for how they would prefer to address this issue–because the lack of an answer means, under current law, a cut of about 22% for all Social Security benefits starting around 2032. A general promise that benefits will not be cut should not suffice. The question is what actual combination of tax increases or benefit cuts would that politician support.
Mark Duggan makes an attempt to open up this conversation in “Social Security Reform in an Era of Fiscal Deficits,” delivered as the 18th Annual Feldstein Lecture at he National Bureau of Economic Research last July (The Reporter: NBER, 2026, Number 3, video avaialble).
Some of Duggan’s discussion has a tone of frustration, because the coming insolvency of Social Security has been obvious to anyone who was paying attention for decades now. Relatively small change, taken a few decades ago, would by now have compounded into solutions that would have preserved the program for decades. For example, Duggan points out that the single biggest step taken in 1983 was to phase in a gradual rise in the date for full retirement benefits, from age 65 to 67. (Other steps in 1983 included accelerating some already scheduled payroll tax increases and taxing Social Security benefits for those with high incomes.) The slow phase-in of pushing back the retirement age was set up to have zero effect on anyone who was age 46 or older as of 1983. The full retirement age could have been nudged back further, or other steps taken, in the last few decades. But in this area, the broad bipartisan compromise was one of neglect.
Here are a few snapshots from Duggan’s talk. This figure show the annual deficits and surpluses for Social Security over time. You can see the annual deficits leading up the 1983 reforms, then the annual surpluses while the trust fund was built up, the annual deficits as the trust fund has been drawn down, and the deficits to come.
If we start from a baseline that the existing reciplents of Social Security should not have a reduction in current benefits, then the question is how to fill the gap. Duggan discussed a number of possibilities in his talk; here, I’ll just list some of them, with a sense of the tradeoffs.
The government could use general tax revenues to fill the gap. However, total US government debt in relation to GDP is already spiking to historically high levels, so there isn’t any tax revenue to spare. Also, this policy would mean changing the core definition of Social Security from a contributory system, where the benefits you receive are based on payroll taxes paid in, to a system funded in part by general tax revenues.
While an outright cut in benefits seems politically unlikely, there are a number of steps that have the effect of cutting benefits. For example, the full retirement age could be phased back another year or two. The formula for calculating Social Security benefits, which involves looking at the highest 35 years of earnings and then applying a formula, could be adjusted. The annual inflation adjustment for Social Security benefits could be tweaked. As Duggan points out, the public pension payments in the US tend to be higher than in other countries.
On the tax side, the 12.4 payroll tax rate for Social Security (half charged directly to the worker, the other half charged indirectly to the worker via the employer) has not risen since 1990. Duggan notes that the Social Security actuaries estimate that a rise to 17.3% would keep the program solvent until 2100. Duggan writes: “Perhaps the most widely discussed policy change has been eliminating the cap on earnings subject to Social Security taxes, as was done with Medicare in 1994. While this would eliminate a substantial fraction of the financing gap (assuming that it was a “pure tax” that did not increase Social Security benefits), it would push marginal tax rates well beyond 60 percent for many high-income individuals in states with relatively high state tax rates, such as California and New York. This increase would potentially reduce labor supply and thus other revenue such as from individual income taxation.”
It’s not hard, sitting at my desk, to fiddle with some combination of these options and figure out a plan I could live with. But Duggan notes the basic problem: “The current structure of Social Security is not designed to weather the economic effects of significant changes such as declining fertility, rising life expectancy, declining immigration, rising earnings inequality, and a declining labor income share. All of these forces are conspiring to create a perfect storm for Social Security financing.”
The arithmetic of Social Security reform is unforgiving. If I had to guess, the first refuge of the politicians will be to appoint a commission. If that fails, the second refuge will be the use of general tax revenues. Along the way, I fear that the possibilities for redesigning the shape of Social Security will be lost. After all, when Social Security was enacted back in 1935, the US economy was very different. Private pensions were rare, and 401k and IRA contributory retirement accounts did not yet exist. Perhaps the next round of revisions should, like the 1983 reforms, make no changes for those who are 46 and older, but for everyone else the United States should begin to phase in over the next few decades a public/private retirement system, where the public system would provide a universal but low-level benefit to assure that no elderly person is dire poverty, while private retirement accounts would be layered on top.
