Many Americans are concerned about the future of Social Security and whether they will receive promised retirement benefits. Some younger people believe that Social Security will not be available when they retire. However, expert Alicia Munnell suggests that a modest increase in the Social Security payroll tax is all that is needed to maintain full benefits in the future. Even without any changes, most benefits can still be paid using payroll taxes, supplemented by trust funds.
Political considerations have historically prevented major changes to Social Security, as older voters are a powerful constituency. However, some action will need to be taken eventually to prevent benefit cuts in the future. Munnell emphasizes that preserving Social Security benefits is crucial for the well-being of current and future retirees. Despite the lack of discussion about tax increases for Social Security, both the Biden and Trump campaigns have expressed commitment to keeping the system intact.
Professor Munnell, a leading authority on Social Security, believes that a relatively small tax increase could address the funding gap. While the estimated total gap is significant, it is a small fraction of the future economy. A 3.5 percentage point increase in the payroll tax would go a long way towards solving the problem. The current funding challenge is primarily driven by demographic shifts, including the retirement of baby boomers and a decline in the number of working-age taxpayers.
The 1983 reforms to Social Security, which included raising payroll taxes and building trust fund surpluses, were designed to address similar challenges. However, unexpected factors such as the 2007-2009 recession and rising income inequality have accelerated the need for further action. Increasing the income cap on taxable wages could help reduce the necessary tax increase. Professor Munnell advocates for a simple fix that includes an automatic adjustment mechanism to prevent future financial imbalances.
There are many options for fixing Social Security, but cutting benefits should be avoided. Only about half of American workers have retirement plans outside of Social Security, and many are not adequately prepared for retirement. Munnell’s proposals align with a bipartisan approach to reform, similar to that endorsed by President Reagan and Speaker O’Neill. Implementing changes sooner rather than later would benefit millions of people and provide greater assurance about future retirement benefits.
