The Social Security trust fund will go bankrupt in 2033 according to the Old-Age, Survivors, and Disability Insurance (OASDI) trustees. With neither Democrats nor Republicans appearing willing to reduce benefits or increase the retirement age, the only way to make Social Security solvent is to increase revenue. While this can be done, it will come at the great financial detriment of young people entering the work force who are already struggling with the cost of living.
Romina Boccia and Ivane Nachkebia, director and research consultant for budget and entitlement policy at the Cato Institute, respectively, calculated just how expensive eliminating the Social Security shortfall would be. The researchers cite the OASDI’s trustees’ report, which concludes that, to eliminate Social Security’s projected $25 trillion deficit over the next 75 years while maintaining planned benefits, “Congress would need to raise the payroll tax rate immediately and permanently by 3.65 percentage points.”
Increasing the payroll taxes that fund Social Security from 12.4 percent, the current payroll tax rate, to 16.05 percent may not look intimidating on the page, but Boccia and Nachkebia explain what this rate hike means in dollar terms for the young people entering the work force in 2025. The median 22-year-old worker, who starts with an annual income of $66,636 and retires at 67 years old, would pay an additional $2,432—roughly two weeks of pay—every year, translating to an additional $110,000 of payroll tax throughout his working life.
And that’s not even the worst-case scenario: To make Social Security solvent indefinitely, the payroll tax would need to be bumped up by 5.2 percentage points to 17.6 percent. For a 22-year-old entering the work force, this means forgoing $3,465 in income every year, nearly three weeks’ wages, adding up to a lifetime earnings loss of $157,000. Though young people are not as influential a voting bloc as retirees, it is still politically infeasible to hike payroll taxes on the entire working-age population, so this “solution” is unlikely to be implemented by Congress.
Boccia and Nachkebia detail other ways to close the Social Security shortfall, such as lifting the income ceiling on the payroll tax and borrowing to cover deficits. The first, while more politically viable than increasing the payroll tax rate, “would only cover half of the long-term funding shortfall,” explain Boccia and Nachkebia.
Another option is the most likely: Congress can cover Social Security’s cash flow deficit without increasing taxes by borrowing more money. Doing so could precipitate a systemic debt crisis in the U.S. as creditors lose confidence and demand higher yields to hold bonds, causing net interest payments, which already account for 14 percent of federal spending, to balloon. Ultimately, this could result in massive inflation as the government prints money to pay its debts, eroding the real value of future retirees’ life savings, resulting in another situation in which working-age people are forced to subsidize the retirements of the elderly.
