Report: Fix Social Security Now–or Pay a Stiff Price

A bipartisan think tank finds that the costs of shoring up Social Security will skyrocket in coming years. We need to act now, while the costs are manageable.

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Sometimes waiting makes sense. A 62-year-old who waits until age 70 to file for Social Security benefits can expect almost twice the monthly benefit. A child that learns to save and consider before spending grows up better-adjusted, research shows.

But in the money world it’s often best to act now. That’s especially true of retirement saving. An extra 10 years of growth might double your nest egg at age 70. Likewise, from a policy standpoint, addressing the projected Social Security shortfall now would cost much less than kicking the issue down the road, a new report argues.

Social Security has already passed one important milestone on the road to insolvency: The program pays more in benefits than it generates in revenue. Another milestone is fast approaching: By 2033, the cumulative Social Security surplus (excess money collected over the decades and invested in Treasury bonds) will run dry. At that point, all beneficiaries regardless of age or income will face an immediate 23% benefits cut.

But the situation is less dire than it seems—if lawmakers act soon. The shortfall could be closed with a 16.5% across-the-board cut in benefits or a 20% cut for new beneficiaries, according to the report from the bipartisan Committee for a Responsible Federal Budget. That’s not painless. But it beats the alternative. In 10 years, the required benefits cuts would be 19% or 30%, respectively, the report states.

Another immediate fix would be a 2.7 percentage point payroll tax increase—from 12.4% to 15.1%. That jumps to a 3.3 percentage point hike in 10 years or 4.2 percentage points in 20 years, the report states.

Acting now also helps beneficiaries. There is no Tooth Fairy. At some point, we must address the shortfall and doing so soon would cost less and give future retirees more time to prepare for the new reality.

Some 162 million Americans pay Social Security tax and are counting on a payout when they retire. But they also know that the system cannot continue to function as it does today. They’d like some certainty to help in their planning. Large and abrupt changes are difficult to work around; gradual and predictable changes can be better managed.

For example, a 10% cut in benefits for a 30 year old who will retire in 2050 could be totally offset if that individual—or her employer—set aside an additional 1.1% of salary, the report shows. Waiting 20 years before a 10% cut in benefits would require setting aside an additional 2.7% of income.

As the authors conclude: “Waiting to enact reforms would be a significant mistake. The longer policymakers wait to act, the worse off taxpayers and beneficiaries will be.”