This year’s Social Security Trustees Report, which the agency’s new commissioner expects to be released sometime in April, will likely echo previous warnings. The trustees’ last annual report cautioned that unless Congress changes the law, Social Security will only have enough money to pay about 80% of current benefits by 2034. That is when the program’s reserves run dry and it will only be able to pay out what Social Security taxes bring in.
Social Security’s long-run funding problem is widely known. What’s less apparent is that the process of spending down its reserves is already increasing federal spending and pushing up annual deficits. Drawing down reserves in the Social Security trust fund requires the U.S. Treasury to sell bonds.
As Social Security moves toward debt financing organically, the Center on Capital and Social Equity recently explored two related and unconventional policy options to deal with the shortfall: funding from long-term bonds and help from the Federal Reserve Bank. These findings were shared with congressional committees last week.
A related and deeper problem than how to structure Social Security’s funding is demographics. The U.S. is not producing enough children or allowing sufficient immigration to build the type of workforce needed to sustain Social Security’s current level of benefits.
As pointed out last year to the Senate Budget Committee, after almost 40 years of rendering a surplus, Social Security’s revenues dropped below expenditures in 2021. As a result, the federal government has had to raise an additional $56 billion in 2021, $22 billion in 2022, and an estimated $53 billion in 2023 to pay promised benefits. Social Security’s annual funding shortfall is projected to reach $378 billion in 2032 (unadjusted for inflation) just before its reserves run out.
Social Security’s trust fund serves two purposes: providing a checking account to track money continually flowing in and out of the program, and holding asset reserves, accumulated during years of surplus along with interest. Notwithstanding the internal functions of the trust fund, Social Security operates on a pay-as-you-go basis when viewed as part of the consolidated federal budget. In the end, money paid out needs to come from somewhere in current federal spending, borrowing, and tax revenue.
The Center on Capital and Social Equity’s analysis hypothesizes that Congress could authorize the Treasury Department to sell special 50-year to 100-year bonds to help cover Social Security’s shortfall and send the cash to the Social Security trust fund, which, in turn, would carry an obligation to repay the rest of the government when the bonds matured. In this way, the rest of the federal government would be loaning Social Security money, just as the social insurance program provided cheap financing to the rest of the government for decades as it generated a surplus during a period when the ratio of workers to beneficiaries was higher.
The longest-term bond now issued by the U.S. matures in 30 years. Already, 14 OECD countries, most with slowing population growth and increasing life spans, have issued sovereign debt with maturities ranging from 40 to 100 years. Buyers include pension funds and insurance companies managing long-term risk and cash flow. Could Social Security debt financing dovetail with future needs of private sector retirement funds?
The Fed could also play a role. Much as the central bank has helped salvage distressed and insolvent banks, hedge funds, airlines, and insurance companies, Congress could authorize and direct it to acquire debt providing cash to Social Security as assets on the bank’s balance sheet.
While the Social Security trustees frame financial solvency in terms of pre-funding the program for 75 years, the program already is operating on a pay-as-you-go basis, relying, along with the rest of the government, on increasing levels of debt financing. Though policymakers could shore up Social Security financing without it, long-term debt might be a useful tool in helping break deadlocks to reach a compromise over a package of tax increases and benefit cuts.
CLICK HERE TO READ MORE FROM RESTORING AMERICA
If Congress does not act, in about 10 years benefits for more than 80 million people will drop by 20%. In 2023, Social Security payments averaged $1,827 a month. The disruption of an average monthly cut of $365 would be enormous — and not only for tens of millions of elderly and disabled people and family members who could no longer pay all their bills. It would also impact food stores, landlords, medical providers, nursing homes, and others receiving that money downstream.
The longer policymakers wait, the more jarring the economic and political impacts of refinancing Social Security are likely to be.
Karl Polzer is founder of the Center on Capital & Social Equity and a member of the National Academy of Social Insurance.