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Recent news reports indicate the Social Security Trust Fund will run out of money in 2035. What should be done? First, some background.
Social Security currently spends $1.145 trillion per year, making it the largest government expenditure program in the United States and probably the largest expenditure program in the world. Social Security supports 65 million beneficiaries, including retirees, their survivors and the disabled. Its beneficiaries account for 20% of the U.S. population. Medicare, which covers health care expenses for the elderly, spends $830 billion annually, so Medicare and Social Security together spend nearly $2 trillion per year. By comparison, U.S. defense spending is $801 billion, and the United States spends more on defense than the next nine largest-defense-spending countries combined.
Of course, Social Security is a transfer program financed by a payroll tax assessed on the earnings of current workers. If Social Security collects more in tax revenue than it pays out in benefits, the surplus goes into the Social Security Trust Fund. These surplus funds can be invested only in interest-bearing U.S. government bonds.
From 1982 to 2020, the payroll taxes collected, plus the interest earned from the trust fund’s bond portfolio, exceeded the benefits the system paid out, so the nominal dollar amount in the trust fund actually rose every year. However, in 2021, Social Security had to draw $56 billion from the trust fund to pay for the benefits it distributed.
The trustees of Social Security project this trend will continue. Unless something is changed, it is also projected the trust fund will be depleted in 2035, when the system’s revenue will cover only about 80% of its promised benefits. So, what to do? Obviously, some combination of benefit reduction and revenue enhancement must be implemented eventually, and, in our opinion, the sooner the better.
In the 1990s, Sweden reformed its old-age pension system. It made a number of tweaks, but most notably made the system’s benefit obligations contingent on tax revenue collected. The Swedish system guarantees a basic fixed benefit to all recipients, but additional payments above that minimum depend on tax revenue. This ensures that those who rely on the system as their primary or sole source of retirement income are protected and secure in their income. It also ensures the system does not face a perpetual crisis of insolvency.
A balanced budget—what a novel Nordic import! A good model for the USA.•
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Bohanon and Horowitz are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.
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