The lack of political will to address a looming Social Security funding crisis is prompting some people to get creative with ideas for making the system last longer or having the private sector be more involved.
"A major reform should focus on retirement security writ large," said Shai Akabas, director of economic policy at the Bipartisan Policy Center in Washington. After a special commission formed by the center spent 2014 and 2015 looking at the U.S. retirement system, "the main lesson I learned is that a Social Security package full of benefit cuts and tax increases will be almost impossible to sell," Mr. Akabas said.
Increasing benefits for vulnerable populations and improving other elements of the American retirement system, including defined contribution accounts, lifetime income options and tax credits, among other ideas, "provides a much more attractive narrative and it will also produce better results by looking at the system holistically," he said.
The crisis is real.
By 2021, the Social Security trust funds for retirement and disability insurance will begin drawing down assets to pay benefits. The trust funds will be out of money by 2034. At that point, Social Security revenue will only cover 77% of benefits promised, gradually decreasing to 73% by 2091. Over the next 75 years, Social Security will owe $12 trillion more than it is projected to take in, according to the latest trustees' annual report issued in July.
That means all Social Security recipients at the time of insolvency will get 23% less, or the payroll taxes split between workers and employers to fund it would have to immediately increase to an estimated 15.2% from the current 12.4% of payroll.
Under the middle path of several scenarios modeled by Social Security actuaries in the report, payroll taxes will hit 17% in 2037 and stay there for several decades, before going higher.
Actuaries and lay people alike know the main culprits are the record number of baby boomers retiring now or soon, with fewer young people to take their place in the workforce and pay those taxes.
Unless current tax revenue increases, an exhausted the trust fund also means that when it comes to income replacement in retirement — measuring Social Security benefits as a portion of pre-retirement earnings — rates for a typical 65-year-old worker will drop to 27% by 2090 from 39% today and 36% in 2027, when the full retirement age increases to 67, as dictated by the 1983 reforms.