Updating the Cost of Delay for Social Security

Click here to read the original paper on the cost of delay for Social Security.

Click here to see an updated version of this analysis for 2015.

The Social Security Trustees recently showed what it would take to make Social Security solvent over 75 years: immediately raise everyone’s taxes by over 2.8 percentage points, immediately cut everyone’s benefits by 17 percent, or cut benefits for new beneficiaries immediately by 21 percent. They also warn that those costs will go up substantially if our leaders in Washington procrastinate. Indeed, waiting until 2033 will increase the needed adjustments by 50 percent. As they explain:

If substantial actions are deferred for several years, the changes necessary to maintain Social Security solvency would be concentrated on fewer years and fewer generations. Much larger changes would be necessary if action is deferred until the combined trust fund reserves become depleted in 2033.

The Trustees make clear that there are two costs to waiting. First, interest accumulates in the trust fund so changes made sooner have a greater effect than the same change made in later years. Second, taking action sooner allows the burden of changes to be spread out over more people, lessening the burden on future generations. In a paper last August, we demonstrated arithmetically how changes became larger and different conditions became harder to maintain the longer policymakers wait to act. In other words, policymakers will have less tools available.

As mentioned above, maintaining solvency over 75 years by increasing payroll tax rates would require a 2.83 percent immediate payroll tax increase. Waiting ten years would raise that rate increase to 3.5 percent (for a 15.9 percent total rate), and waiting until 2033 would raise the rate increase to 4.3 percent (for a 16.7 percent rate). Delaying the rate increase also effectively exempts those close to retirement and puts more of the burden on younger workers.

As for benefit cuts, the necessary cut to maintain 75-year solvency is 17.4 percent if applied to all beneficiaries and 20.8 percent if applied only to new beneficiaries. The cut for all beneficiaries would climb to 21 percent in ten years and 25 percent by 2033. For new beneficiaries, the cut would climb to 32 percent in ten years, then would rise rapidly until 2031, when it would no longer be possible to maintain trust fund solvency even by eliminating benefits entirely for new beneficiaries. It should be noted also that these numbers assume cuts are applied to beneficiaries uniformly, but most reform plans protect low-income retirees.

In our paper last year, we showed two other dimensions of the cost of waiting. First, we are only five years away from being unable to close the shortfall entirely with benefit reductions while ensuring that real benefits do not decrease over time. Second, waiting to make changes gives people less time to prepare and makes it harder for them to make up benefit losses with personal savings; for example, a person making $50,000 would have to set aside about 1% of their income per year starting this year to offset a 10% benefit cut in 2050, but they would have to set aside more than 2.5% per year if they started 20 years later.

Waiting until the last minute has become commonplace for decision-making in Washington, but lawmakers should not throw away the time they have for Social Security. If they use it wisely and start now, they have a much easier constructing a smart reform plan that better protects low-income and current retirees and gives others time to plan for changes.


delaying SS "reform"

I agree that it is poor policy to wait to fix Social Security... even though it isn't broken.


Social Security will ultimately need about a 4% increase in the tax...2% for most workers and 2% for their employers.  That rate does not need to be reached for forty or fifty years or more.  A one tenth of one percent increase each year, starting by 2017 would keep Social Security solvent forever.


And within limits the percent of increase is largely meaningless.  People have always paid for their own Social Security insurance.  This has nothing to do with the budget or the debt.  As long as workers hope to retire they will need to save for retirement.  Social Security provides them with the means to save at least enough, safe from inflation,market losses, and personal bad luck.  Since their wages will be growing about 500 dollars per year, it is entirely reasonable that they would put aside an extra 50 dollars per year to pay for a retirement that will be longer than mine because they will be living longer.


Workers will have about an extra 12,000 dollars per year in income by 2030, it really will not be an unreasonable burden for them to pay an extra 500 dollars of that for their Social Security.


It would in fact be a great deal more fair for them to reach that 500 dollars per year gradually by increasing their tax 50 dollars per year for ten years, than to increase their tax 250 dollars per year all at once while telling them a "delay" will result in the larger increase.  The larger increase... eventually... is already baked into the pie.  You are only trying to scare them into thinking they need to come up with an almost as large increase right away.


I wish I believed you really cared about the budget. But you only seem to care about telling not quite the whole truth about Social Security in order to weaken it to destroy it.

We're not advocating

We're not advocating immediate abrupt solutions, but using them as examples to show the cost of delay. And indeed, one of the greatest costs of delay is that it eventually makes gradual solutions like the one you present impossible.

You're right that we could maintain 75-year solvency with a 4 percentage point rate increase (0.2 percentage points per year) spaced out over 40 years starting in 2017. Waiting just five years more (until 2022) would cause that solution to fall short, extending trust fund solvency to only the mid-2040s, instead of 2090 or so. Waiting ten years would mean it would only extend the life of the trust fund by a year.

So the necessary annual changes to the payroll tax rate would have to be higher than what you propose if we delay. And on top of that, the ultimate rate would need to be somewhat higher, something like 4.5% instead of 4.0% depending on the schedule of the increase.

Relative Relationships

Your comment took me back a bit. Yes people in general will make more money over time due to inflation. However, it unclear to me that devoting more to Social Security, or anything else for that matter becomes more affordable. Moreover, because we have run up a bigger debt to service generally speaking it will probably be less affordable. We need to fix this problem now in a equitable way to prevent additional pain in the future. The demographics and numbers tell us to take action now.

Social Security Reform

 Employers have reaped the benefit of no wage growth over the last 40 years. In 1974 minimum wage was $2.00. You could buy 3.6 gallons of gas for each hour worked. Today minimum wage would need to be $13.30 to buy the same 3.6 gallons. Increase the Social Security tax on employers by 4 percent and you fix the problem. With record corporate profits this is a no brainer. Also give the self-employed a 4 percent tax credit on their Income Tax to offset the increase. Also, increasing the amount of income taxed by Social Security to $100,000,000 would help and I do not think the rich would miss it.  

Rich Should Give it Up Perspective

I simply do not understand this type of perspective. I started working part time in a warehouse when the minimum wage was $1.65 (at least in Massachusetts) which if I am computing correctly was 1968. It received a big bump in 1974 so I'm not sure that is the correct starting date. However, if you take 1.65 and increase it by 3% per year you have $6.43 per hour. Or, if you like take $2 and increase it by 3% from 1974 you get $6.50. Which would say we should reduce the minimum wage to be comparable to 1968 or 1974. I'm not advocating that we should reduce it but to say that the minimum wage is too low on a relative basis is incorrect.

I have read analysis that makes a strong argument that there has been sufficient compensation growth but it has been masked by increasing health costs and demographic changes.

Recently the rich received some significant tax increases and more rapid deduction phase-outs. How much is enough? I know doctors that no longer want to work full-time because it only increases their marginal bracket over 50%. Is this the type of tax environment that is good for the country? I don't think so.

Do to demographic changes we need to implement chained CPI, we need some means testing to limit the benefit or tax the benefit, and we all need to contribute a little more. Marginally increasing the cap, employer tax and employee tax will get us there in equitable way.

Social Security Reform

 There's no need to raise the RATE of FICA taxes in order to prolong Social Security's financial solvency now. The earnings cap on which FICA taxes are paid is $117,000 this year.  This taxes between 80-85% of the nation's payroll. however, the system was designed to tax around 92%. The only solution that's necessary is to raise the cap to a level that goes back to the 92% level. Then, if there's a need to accomodate the demographics of the baby boomer retirement wave, we can have that conversation.  Most people never realize that there is a cap, and the people who hate the Social Security system (read: most conservatives in Congress and many in CRFB) would rather they never hear about it. But, the Medicare tax taxes all earnings at 1.4%. That's probably not enough but its the only fair way to go. The wealthy will find ways around it, like shifting their income from earnings to income from investments like our good friends the Romneys, but it will still make a big difference to the 99% who need their Social SEcurity to keep up with inflation.   

Taxable Maximum

Actually, CRFB write often about raising the taxable maximum (see for example http://crfb.org/blogs/how-much-payroll-tax-increase-would-it-take-fix-so...), and often speaks favorably about the Simpson-Bowles plan -- which would do just that (http://crfb.org/blogs/event-recap-can-simpson-bowles-save-social-security).


Increasing the amount of wages subject to the payroll tax can be an important part of any Social Security reform plan. Unfortunately, it cannot by itself solve the problem. Raisng the tax max to cover 92% of earnings, as you suggest, would only close about one third of the 75-year gap. Even eliminating the taxable maximum altogether would only close 45% of the gap according to CBO, and 65% (or 80% if no benefits are paid) according to the Social Security Actuary. In the 75th year, changes to the tax max would save much less.


To be sure, any increase in the tax max will help improve the financial state of the program -- and certainly could be part of the solution. But it will most certainly not be enough to make the program sustainably solvent.

Tax Minimum

Social Security was designed to have a relationship between the amount an individual contributed to the system through Payroll Taxes and the amount of benefits received. This was true for all those who contributed, except for the earliest beneficiaries who received benefits despite very little having been contributed.


Raising the limit on taxable income only improves the situation if the amount of benefits is limited. If not, then the outlays goes up too. Adding the tax, but limiting benefits in affect makes the added contribution an income tax, not a "contribution" into the system for future benefits. What % of the last dollar of income should someone have to pay? This would add an additional 12.4%?

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