Fixing Social Security

Introduction

Social Security is the United States’ most important social insurance program. It provides at least half of income for about four in 10 beneficiaries, and more than 90% of income for one in seven beneficiaries. Social Security also is the nation’s oldest and largest anti-poverty program, keeping about 20 million older Americans and one million children out of poverty.  

Why is it critical to revise this vital program? According to the Social Security Administration’s (SSA) Office of the Chief Actuary and the Congressional Budget Office (CBO), the Old-Age and Survivor Insurance (OASI) Trust Fund—the source of the program’s retirement benefits—is forecast to exhaust its funds in 2033. When that happens, the available revenues to the OASI fund will be able to finance about 83% of scheduled benefits. In other words, the resulting gap means Social Security checks for these beneficiaries will shrink by about 17%.

Avoiding that insolvency will require substantial policy changes. The size of the deficit over 75 years—3.5% of taxable payroll, according to the 2024 Social Security Trustee’s Report—is about 1.7 times as large as the deficit the program was facing nearly four decades ago, when Congress in 1983 adopted the most recent amendments to the Great Depression-era Social Security Act. Relying on different assumptions about fertility, immigration, economic growth, and other factors, CBO predicts an even larger deficit over 75 years—4.3% of taxable payroll or more than twice as large as in 1983. Both forecasts make the fundamental point that the Social Security system will not have enough money.

The blueprint proposed here would virtually achieve solvency for the Old-Age, Survivors, and Disability Insurance (OASDI) program’s actuarial balance over the 75-year period. And it would achieve this financial stability in ways that adhere to the program’s 90-year tradition, introducing no new revenue sources. This blueprint includes both ways to increase the program’s revenue and to improve certain benefits. It also includes several ways to stabilize the system’s finances. The major proposals to stabilize its finances would increase the taxable maximum earnings to cover 90% of wages, slightly increase the payroll tax, and close a loophole through which some business owners now are escaping the payroll tax. The plan would change benefits by increasing the retirement age for high earners and expanding the number of working years used to compute wages. Other aspects of the plan would raise legal immigration levels to increase the pool of tax-paying workers and ease workforce shortages. And more proceeds from taxes on Social Security benefits would be devoted to the OASDI trust funds.

At the same time, the blueprint would strengthen child benefits and protections for Americans with disabilities and the survivors of workers who die. It would achieve universal coverage shortly after the program’s 125th anniversary and would make the system more progressive. This plan is constructed so that, over the 75-year period, revenue increases match the benefit reductions minus the benefit improvements.

A word on the causes of the system’s financial problems: it boils down to demographic trends. The United States has an aging population, with people living longer despite COVID-era setbacks. It is projected that by 2060, compared to 2017, overall life expectancy will have increased, but the extent depends on people’s income. At the same time, fertility has declined below replacement levels and is predicted by Social Security’s actuary and the CBO to remain that way for several decades. Together, these broad forces have led to a striking change in what is known as the old-age dependency ratio. The number of working-aged people ages 18 to 64 per older adult 65 and older has declined from 5.7 in 1970 to 3.7 in 2020. And it is expected to fall further, putting intensifying pressure on Social Security’s finances as fewer workers contribute to its trust fund while more older people qualify for benefits.

The need to stave off the trust fund’s depletion comes as the Democrat and Republican political parties have sharply divergent views about how to fix the problem. Members of both parties in Congress have recently introduced Social Security solvency plans. The Democratic plans call for restoring solvency entirely by increasing revenue. The major Republican plans would restore solvency entirely by reducing benefits. Both parties have been reluctant to move Social Security legislation because doing so would come with political pain: raising taxes or cutting benefits.

Even so, there are several powerful reasons for Congress to tackle Social Security solvency in 2025. First, restoring solvency would put the country on a more secure fiscal path at a time when recent federal budgets have had huge deficits. Second, public debt is on a risky and troubling path. Besides, recent polling has found that most Americans say Congress should act now to shore up the program’s funding. The American people, in other words, are relying on lawmakers to ensure that their Social Security benefits are protected. Waiting would make the policy changes needed to restore solvency greater, including the likelihood of a larger reduction in benefits. Ultimately, neither political party’s position will prevail. The only way to resolve these differences is through compromise and a more centrist approach.

What are the goals of the proposed blueprint

This plan is guided by a set of goals or principles. Here is each one and why it matters:

Solvency

Restoring solvency and avoiding the trust fund’s depletion is by far the most important goal. Americans want confidence that the benefits they have been promised will be there for them. Solvency depends on long-range economic and demographic projections, so how long the system can be expected to stay financially sturdy can change over time. For that reason, the trust fund should have reserves, in part to withstand economic downturns. The goal is to achieve 75 years of solvency under SSA actuary assumptions.

No benefit reduction for current beneficiaries

No Americans receiving Social Security benefits before the blueprint becomes law would have those benefits lowered.

No general fund financing

From its beginning, Social Security has been financed entirely through payroll taxes, interest on balances in the system’s trust funds, and taxes that recipients pay on their benefits. This link between wages and benefits has been a central principle of the program and a foundation of its political support. This blueprint preserves that tradition, avoiding other financing, such as from the federal budget’s general fund, which would worsen future federal deficits.

Maintain the bipartisan nature of the program

The blueprint is intended to preserve the bipartisan nature of every major Social Security action before now. For nearly four decades, there has been a practical reason for bipartisanship as well as an ideological one. By law, the program may not be altered through a reconciliation bill, so 60 votes are required in the Senate, and no party is likely to control that many votes in the foreseeable future.

Improve the system’s progressivity

The plan strives to make the Social Security system more progressive, primarily by raising taxes and reducing benefits for higher earners.

Increase risk protection

This blueprint is designed to bolster the program’s help with three types of risk against which it already provides some economic protection: death, disability, and old age. The proposed benefit improvements address these risks, plus the financial burden on grandparents raising grandchildren.

Universal participation

Some workers—primarily state, city, and county employees in certain places—remain outside the federal retirement system. This can be for their entire career or a portion of it. Because of the way Social Security calculates benefits, retirees who had these mixed work lives can end up getting larger benefits than those in the system all along. The blueprint’s goal is to eventually bring all workers into Social Security.

Description of a centrist proposal to restore solvency

Table 1 outlines the major elements of this blueprint and two ways of thinking about their effects—on the Social Security system’s finances and the federal budget. For further details, please see the full paper.

The table’s first column shows each element’s anticipated impact on the program’s solvency over the coming 75 years. That column is expressed as a percent of the earnings subject to the Social Security payroll tax, known as taxable payroll. Based on estimates from the Social Security Chief Actuary, the column shows the impact of each element on taxable payroll—that is, how much it would help or hurt the deficit of 3.5% of taxable payroll that is forecast over the next 7 ½ decades. The table’s second column shows the total amount of money each element is predicted by an Urban Institute analysis to cost or save from this year through 2035. Taken together, the table’s columns demonstrate that the blueprint’s mix of revenue increases and benefit improvements would cause the 75-year Social Security deficit to virtually disappear and have a positive effect on the federal budget over the next decade.

Tax-based revenue enhancements

Increase the taxable maximum ceiling
This proposal would increase the maximum wages subject to Social Security taxes, so it eventually covers 90% of total wages. This would return the percentage to what it was in 1983—just slightly less than at the program’s beginning—before the increase in wages beyond that taxable limit and the growing number of high earners caused the percentage to drop to just above 80% by 2024. And stopping short of 100% still leaves room for other important budget priorities of both political parties. To get to this new ceiling, the proposal would, starting in 2027, increase this taxable-minimum ceiling six percentage points faster than the current law, so that, according to SSA actuaries, the 90% target would be reached in 2039.

Change rules for pass-through payroll tax
The plan would change current rules under which the definition of taxable self-employment income varies for different types of businesses: investments, which are not subject to Social Security taxes, and employment earnings, which are. Because the types are not always easy to tell apart, these rules enable limited partners and owners of S-corporations to escape payroll taxes on a significant share of their income. To correct this, the proposal would tax, up to the earnings cap, all payments to active, pass-through businesses that meet the material participation standard. The cap would be their individual taxable maximum in a given year.

Increase payroll tax
The OASDI payroll tax would increase from its current 12.4% on wages, split evenly between employers and employees, to 12.6%. That increase of 0.2 percentage points would also be split evenly. It is the smallest amount needed to produce an equal amount of revenue (that is, the reduction minus the improvements)—the core idea of this centrist plan—and make the program virtually solvent for the next 75 years.

Benefit reductions

Increase retirement age for high earners
The program’s normal retirement age, the point when a beneficiary becomes eligible for an unreduced benefit, would increase for people in the top two-fifths of the nation’s wage distribution. Currently, that age depends on a person’s birth year, with the age set at 65 for those born in 1937 or earlier and increasing gradually for each year, up to 67 for people born in 1960 and later. The proposal would treat what would be renamed the “benefit age” somewhat differently for people who earned the top one-fifth of lifetime wages and those in the fifth just below that. For the highest fifth, the policy would start increasing the retirement age in 2037 and keep raising it by two months annually until reaching a retirement age of 70 in 2054. For the next fifth down, the retirement age also would phase in, with the ultimate retirement age depending on exactly where within that fifth a person’s wages are. Calculations would be separate for men and women. These changes would affect retirement benefits—not disability or survivor benefits. Treating high earners’ retirement age differently is fair because of trends in life expectancy, with men and women with high incomes living longer than everyone else, while those with the lowest incomes tending to live shorter lives than their counterparts in the past. Women aged 62 can be expected to live 26 more years if their earnings are in the highest quintile, compared with just under 20 more years in the lowest quintile. For men, the gap is even greater—25.6 years for the highest quintile, compared with slightly more than 15 years for the lowest.

Increase the number of working years used to calculate Social Security’s average indexed monthly earnings.
The average indexed monthly earnings, used in determining benefits, would be based on a new formula, so that, by 2040, it would rely on the highest 40 years of earnings, rather than the current 35 years. This gradual change, to begin in 2032, reflects increases in life expectancy, signaling that people need to work longer. It also would help balance the proposal’s benefit reductions and tax increases. While extending eventually to 40 years would have the most negative effect on low-income workers, who tend to have longer periods of unemployment, that disadvantage would be counterbalanced by other policy changes in the Supplemental Security Income (SSI) program that will be part of a separate, forthcoming Brookings proposal on reducing poverty among older and disabled adults with low wages.

Tax all Social Security benefits of high earners
To make the system more progressive, the proposal would tax all Social Security benefits received by single people with adjusted gross income above $100,000 and couples with income above $125,000. That would set them apart from people with less earnings, who are taxed on half or 85% of their Social Security benefits, depending on their income range.

End the dependent retiree spouse benefit
The proposal would gradually eliminate a policy for new retirement beneficiaries that currently provides up to half a partner’s benefits for spouses who are at least 62 or care for a child under 16. The benefit would be lowered by five percentage points a year starting in 2027 so that it disappeared by 2037—sooner for spouses whose partners have income in the top 25% of earnings. It would not apply to disabled spouses or widow(er)s, but this change reflects that the gap has shrunken between the labor force participation of women and men.

Eliminate Child Retiree Benefits
Social Security benefits would end for children of a parent who begins retirement benefits starting in 2027 and a partner who cares for them. This would eliminate a policy in which such children are entitled to up to half of their parent’s benefits (three-fourths if the parent has died), but it would not alter the program’s help for children who are disabled, adopted, or cared for by grandparents. This would end a policy that currently encourages early retirement and subsidizes decisions to have children later in life.

Benefit Improvements

Increase survivor benefits
Benefits would be increased for the surviving spouse of a worker who has died. As under current policy, the survivor could choose to get the larger of the benefits that they or their deceased spouse had been receiving. But if the amount were higher, the survivor could, instead, choose to receive 75% of their combined benefits—a closer match to the estimated typical drop in household expenses once one member of a couple has died.

Create a disability benefit for older workers with disabling conditions that make them unable to do their jobs
The proposal would establish a new Early Retirement Disability benefit for people at least age 58 who are not healthy enough to work—but do not qualify under the stringent, complex rules for Social Security Disability Insurance or Supplemental Security Income. This new benefit is intended to stave off financial hardship among people in poor health, many of whom retire earlier than planned and take early Social Security benefits at a considerable reduction. To qualify for the new benefit, people would need to prove that they are unable physically or mentally to carry out their most recent job.

Restore and expand student benefit for children whose parents are disabled or dead
The plan would broaden eligibility for Social Security payments to children and young adults whose parents are disabled or no longer alive—a benefit currently available through high school or age 20, whichever comes first. The change would improve upon an even earlier policy from the mid-1960s that had allowed these benefits for unmarried students attending certain types of higher education full-time. The proposal would, starting in 2027, provide the benefit to students whose parents are disabled or dead through age 25, regardless of their marital status or the type of higher education they are pursuing. The payments also would be available to grandchildren receiving benefits based upon their grandparents’ earnings record.

Provide a child benefit to grandparents or certain other relatives caring for children
Eligibility would be loosened for benefits on behalf of children who are in the custody of a grandparent or other eligible relative of the same generation, such as a great aunt or uncle. Starting in 2027, benefits would be available if the child has been in the custody of a grandparent or other eligible relative for at least six months—rather than the current full year—and receives at least half their financial assistance from that caretaker, without regular caretaking by a biological parent, even if they are in the same home. For children receiving a survivor benefit or a benefit for the child of a disabled parent, they could switch to this new benefit, if it would be larger. The caretaking grandparent or other eligible relative would not need to be receiving retirement benefits.

Improve benefits for disabled adult children
The proposal would make it easier for a “disabled adult child,” with a qualifying physical or mental impairment, to be eligible for this benefit. Unlike under current law, they no longer would need to be unmarried or to have developed their disability before reaching adulthood. And they no longer would be restricted in how much they could earn after reaching age 22.

Coverage and transfers

Devote all proceeds from taxes on Social Security benefits to OASDI trust funds
The proposal would end a policy adopted about three decades ago that has devoted proceeds from some taxes on Social Security benefits to the Medicare Hospital Insurance Trust Fund, which was running short of money at the time. All proceeds from taxes on Social Security benefits would gradually be devoted to the OASDI trust funds. In a forthcoming set of Medicare policy proposals, we will lay out ways to protect the hospital trust fund.

Expand the labor force by changing policies on legal immigration
The population of working-age adults who contribute to the U.S. economy and the Social Security system would be expanded in several ways: increase the cap on permanent employment-based migration (EB-1 through EB-5), plus the temporary employment program, by 50% in the initial year, then 30% annually after that. Allow other major permanent migration caps to slowly increase by 1.5% annually (F-1 through F-4 family preference visas, diversity visas, combined family preference). Make status adjustment available for certain undocumented immigrants. The plan also would increase administrative funding to handle backlogs in the immigration system and the increase in legal immigration.

Achieve universal coverage in Social Security
The proposal would fold into the program the 6% of U.S. workers currently outside the Social Security system. These 6.6 million people are primarily state and local government employees who are insured by alternate public pension plans and thus do not pay into Social Security during whatever part of their working lives they are in such “uncovered” jobs. Starting in 2032, all newly hired employees of state and local governments outside Social Security would be covered by the program. To help the outside pensions stay solvent as they manage the transition, low-cost federal loans would be available. The switch would help the workers involved because, compared to some outside pensions, Social Security provides automatic cost-of-living adjustments and better protections for spouses of living and dead workers and dependents, and it does not disadvantage workers who change jobs.

Conclusion: Why should this solvency plan be adopted?

This blueprint meets its chief goal of making the Social Security system virtually solvent while improving several important forms of help to certain groups of beneficiaries. It averts the possibility of benefits being cut across the board when the Social Security Trust Fund becomes exhausted, as predicted in 2033. Specifically, this proposal restores solvency under SSA assumptions for 75 years and adheres strictly to the program’s fundamental principles over its 90-year history. The blueprint makes the system more progressive, achieves universal participation, and does not rely on general fund borrowing or financing. Compared with alternatives, it has better prospects of securing Democratic and Republican support and maintaining what always has been the bipartisan nature of the program.

Read the full blueprint here