Don’t Lose Sleep Over Social Security

Editors’ note: MarketMinder is strictly nonpartisan—never for or against any party, politician or policy. Our analysis of political developments seeks only to ascertain their potential economic, market and personal finance implications, if any.

With political rancor over Social Security running high, the two parties’ wrestling about its direction continues hogging headlines. Meanwhile, 70% of workers reportedly don’t believe it will be around when they retire.^[i] But we don’t think worrying over its solvency—or proposed solutions to “fix” it—is warranted. The program’s state could be improved by relatively minor shifts, and there is little reason to think those must—or are likely to—come soon.

Although Social Security’s situation could be improved, it isn’t in the dire straits so many pundits claim. Political sparring about it during—and after—the State of the Union has prompted the current concern, but the general alarm stems from the projections in Social Security’s annual Trustees’ report. Its forecasts routinely suggest the Social Security trust fund risks being depleted by a certain year, with only partial benefits paid out thereafter. In 2021, the Trustees’ report estimated that would happen in 2033. Last year’s report pushed it one year later, to 2034. The 2023 report isn’t out yet—and won’t be until the summer—so discussion now is more about “fixing” than new data.

On the projections, rather than fret over them, we think they show how much of a moving target they are. Inherent uncertainty around the assumptions they use make straight-line math unreliable. For instance, 2021’s report assumed pandemic recovery would be a long slog. 2022’s found that wasn’t the case. The takeaway: These long-term forecasts aren’t anything to go by. They are very sensitive to what goes on in the near term—and sentiment surrounding the near-term outlook. But a lot can happen in just a few years, a lesson the last three years have taught time and time again.

Even taking Trustees’ reports at face value, though, they show it likely doesn’t take much to extend Social Security’s solvency. If Congress just does nothing, about 80% of benefits would remain intact if funds start to run out as projected after 2034.^[ii] But that is a big IF, and there is a lot Congress could do to ensure future retirees receive full benefits. There is also incentive to do so, given older cohorts are among the most reliable voting blocs.

Social Security is widely considered the third rail for this reason. So it is sort of unusual that both parties are proposing changes aimed at shoring it up—especially the rather big changes hitting headlines now. To oversimplify matters, Democrats propose raising taxes on some workers, and Republicans propose cutting benefits for some recipients. More specifically, the Biden administration has proposed adding a new tier of payroll taxes on annual income above $400,000, which would reportedly extend Social Security’s solvency by 5 years, while also boosting benefits by 2% among other support measures. More progressive Democrats in the Senate would go further. They aim to apply payroll taxes to incomes above $250,000 (currently capped at $160,200) alongside new investment income taxes and claim this would extend solvency by 75 years and give beneficiaries a $200 per month boost.

Republican proposals aim to raise Social Security eligibility’s full retirement age (FRA) to 70—and then link the FRA to future changes in life expectancy. FRA was last bumped up in 1983 to age 67. They would also adjust the benefit formula, making it less generous to those making over 150% of the average income—approximately $90,900—and phase out auxiliary benefits for high-income beneficiaries.

Those are some current legislative ideas, and all of them lack a lot of needed detail now. And that detail may never come—because it isn’t certain these proposals will go anywhere. While we can’t say how or if the debate resolves in the current Congress, we would note that even within each party there isn’t a consensus for any of them—much less bipartisan accord. So inter- and intra-party squabbling may escalate, especially as 2024 electioneering starts.^[iii] But that is all it is—talk.

Given gridlock, big taxes or cuts likely aren’t imminent. Notably, it isn’t even clear Congress needs to act now, given how far out the alleged insolvency date is. In the absence of anything pressing that would impact constituents immediately, we doubt politicians do anything to resolve an attention-getting (and money-raising) campaign issue.^[iv] It would be very, very unusual for them to get their homework done this early.

Look at last time parties touched the proverbial third rail: 1983. As 1982’s Trustees’ report helpfully highlighted at the time: “Without corrective legislation in the very near future, the Old-Age and Survivors Insurance Trust Fund will be unable to make benefit payments on time beginning no later than July 1983.”^[v] Congress didn’t act until that April, when they agreed to marginally raise combined employee and employer tax rates from 13.4% to 15.3% and, as mentioned earlier, gradually notch FRA a couple years higher to 67 for those born in 1960 onward. This wasn’t a big shock to the system. It was incremental by design. Yet it kicked the can down the road by several decades.

As this early-1980s’ episode suggests, Congress will act when they have to. Maybe it will wait until the last minute, maybe not. Regardless, it may not take huge changes. It could be as simple as a marginal tax hike (or increase to the payroll tax cap) and delaying the retirement age or benefits formula for people scheduled to retire years afterward, giving people time to adjust. Again, the incentive of not roiling the electorate will matter a lot. So while worth watching, in our view, Social Security and potential reforms to it aren’t anything to worry over.