Inflation Is Making Social Security’s Solvency Problem Worse

The significance of the September inflation numbers released this morning extends beyond confirming the continued hit to Americans’ wallets—these numbers also provide the final data point for the Social Security Administration’s cost-of-living adjustment (COLA) for next year’s benefits. Beginning in January 2023, monthly Social Security benefits for individuals on the program will increase by 8.7%, providing current beneficiaries welcome respite from ongoing price increases but also potentially hastening the impending depletion of Social Security’s primary trust fund. Experts, elected officials, and stakeholders have understood the extent of this problem for decades, but typical partisan lines in the sand and fear of political consequences have stymied action. Today’s COLA announcement serves as yet another reminder that policymakers must take swift action to shore up Social Security; they simply cannot afford to delay any longer.

The 2022 Social Security Trustees Report released in June (which assumed this COLA would be 3.8%) estimated that the program’s Old-Age and Survivors Insurance (OASI) trust fund will run dry in 2034, at which point all beneficiaries will face an immediate 23% benefit cut to bring payments in line with program income (mainly payroll taxes). The difference between scheduled benefits and funded benefits will continue to grow for decades as the population over the age of 65 reaches unprecedented levels. Far from a minor inconvenience, this cut will devastate many retirees, especially the roughly 20% of Americans aged 65 or older who rely on Social Security benefits for over 75% of their income.

Figure 1: Trust Fund Income and Expenditures as Percentages of Taxable Payroll

Source: 2022 Social Security Trustees Report

Policymakers have known for many years that Social Security would become insolvent in the 2030s, and their lack of action has served only to magnify the adjustments needed to get the program on a sustainable path. Consider that in 2012, a payroll tax rate increase of 2.61 percentage points (to 15.01%) or an across-the-board benefit cut of 16.2% would have ensured the Social Security trust funds’ solvency for the full 75-year period considered by the trustees—but the benefit formula has not changed, and the payroll tax rate remains the same 12.40% as it was in 2012. Today, shoring up the trust funds would require a tax increase of 3.24 percentage points (to 15.64%) or a benefit cut of 20.3%, and failing to act until the trust funds run dry in 2035 would necessitate a tax increase of 4.07 percentage points (to 16.47%) or a benefit cut of 24.9%.

Figure 2: The Tax Increase or Benefit Cut Required to Prevent Trust Fund Depletion Keeps Increasing

Ensuring the long-term sustainability of Social Security is a thorny challenge that will require a nuanced, thoughtful, and comprehensive package of reforms, but two reasons for cautious optimism provide a brighter-than-expected outlook for lawmakers:

1. Enhancing Social Security benefits—particularly for those who most rely on them in retirement—and putting the program on a fiscally sustainable path are not mutually exclusive. In 2016, BPC’s Commission on Retirement Security and Personal Savings issued a set of 13 recommendations that would make Social Security solvent for 75 years and beyond, avoid the 23% benefit cut that is set to take effect, and give Americans certainty about what to expect from the program as they prepare for retirement. Far from relying only on tax increases or benefit cuts, these recommendations reflected the compromise—and emphasis on supporting vulnerable beneficiaries—that will be vital for any solution to garner the necessary bipartisan support.
2. Some of the highest-impact reform proposals have recently garnered high levels of public support from Americans across the ideological spectrum. A recent national survey in which participants received a background briefing, heard arguments for and against various Social Security reform options, and then recommended a course of action found significant support among Republicans, Democrats, and Independents for some of the proposals often considered the most controversial, such as raising the retirement age, increasing the payroll tax rate, and reducing benefits for high-income earners.

Next year’s historically large COLA will only exacerbate a problem that has long existed—and long been understood. Although steadily increasing wages may slightly offset this negative impact, the overall impact will likely be to accelerate the draining of the Social Security trust funds. Continuing to delay action will ultimately necessitate reforms that are even more politically difficult and further increase uncertainty for America’s workers and retirees. Policymakers must act now.