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Social Security

The Issue

Social Security, the largest federal government program, marked its 80th anniversary in 2015. It consists of two main programs: Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI). The federal government spent nearly $910 billion on Social Security benefits in 2016. Together, Social Security’s programs account for nearly one-quarter of all federal spending in 2016.

Social Security is the largest among the three major entitlement programs. Together, Social Security, Medicare, Medicaid, and related health spending consume more than half of the entire federal budget. Moreover, these programs are the main drivers of federal spending and debt over the next decade. Eighty-three percent of the projected growth in spending through 2027 is due to the major entitlement programs and interest on the debt. In terms of the size of the economy, Social Security spending is projected to grow by 20 percent over the next 10 years, from 5 percent of gross domestic product (GDP) in 2016 to 6 percent of GDP in 2026.

This spending tsunami is a major threat to limited government because entitlement spending increases automatically each year based on each program’s governing laws. Entitlements get the first call on tax revenues; other priorities, such as defense or national security, must make due with an increasingly smaller share of whatever remains. This supposedly “locked in” spending is steadily undermining other national priorities and threatens the economic future of younger generations.

Decades ago, Washington politicians promised baby boomers health and retirement benefits that are no longer affordable, because the programs were not designed in a way that actually protected taxpayers from the programs’ ever-increasing costs. Not only has Social Security’s payroll tax more than doubled from its initially promised limit of 6 percent, but the current 12.4 percent taken from virtually every worker’s paycheck does not even come close to covering Social Security’s costs. If a trust fund becomes insolvent, as both the SSDI and OASI trust funds are projected to become within fewer than 20 years, benefits are supposed to decline automatically. However, Congress has never allowed this to happen. Instead, when the OASI and SSDI trust funds came close to running dry in 1984 and 2015, respectively, Congress shifted money from one program to the other. These short-term fixes exacerbated the programs’ long-run financial problems and deflected full-fledged and necessary reforms.

Americans now face the consequences of this neglect. The national debt held by the public is three-quarters the size of the nation’s GDP and is growing rapidly. The Congressional Budget Office estimates that without fiscal restraint, public debt could exceed 150 percent of GDP in 30 years, when today’s school-aged children are in their prime working years. That is far from the end of the entitlement programs’ massive growth and costs. Medicare and Social Security face about $50 trillion in long-term unfunded obligations, adding steadily to the public debt as Congress borrows growing sums each year to pay promised benefits.

Since 2010, Social Security has taken in less money from payroll tax revenues and the taxation of benefits than it pays out in benefits, generating cash-flow deficits. Social Security’s estimated 2016 cash-flow deficit was $73 billion. That $73 billion deficit requires $73 billion in new public debt because, although the OASI and DI trust funds are not yet insolvent, there is no real money sitting in them—just a bunch of IOUs. Thus, when the Social Security Administration pays out benefits that exceed its payroll tax collections, the government converts those trust fund IOUs to new public debt. Over the next 10 years, Social Security’s cash-flow deficits will amount to $1.1 trillion, according to the Trustees’ intermediate assumptions. Without reforms, Social Security’s combined trust funds would be depleted by 2034, threatening program recipients with indiscriminate benefit cuts or payment delays.

Old Age and Survivor Insurance. Demographic changes directly affect Social Security’s solvency. Social Security is a pay-as-you-go system that relies on current workers’ payroll taxes to fund current retirees’ benefits. The number of workers to retirees is a critical ratio in financing Social Security benefits. This ratio is referred to as the worker-to-beneficiary ratio.

Over the past few decades, the worker-to-beneficiary ratio has dropped drastically from 42 workers for every one beneficiary in 1945, to 5.1 in 1960, to 3.4 in 2000, to 2.8 in 2015. Projections forecast that the worker-to-beneficiary ratio will continue to decline to 2.3 by 2030. This ratio has been declining rapidly due to the aging and retirement of the baby boomers and the decline in births following the baby boom.

The Social Security benefit structure is so complex that few Americans understand the rules and details that govern their monthly benefits. Social Security benefits depend on earnings averaged over most of a worker’s lifetime. Those earnings are indexed to wage growth and run through a progressive benefit formula. Benefits can vary significantly, however, based on a spouse’s earnings and when a worker and the spouse first claim benefits. Not knowing what to expect from the program makes it more difficult for workers to plan for their retirement.

Disability Insurance. The Social Security Disability Insurance program suffers from a host of more complex problems due to its more complex eligibility determination process and management problems at the Social Security Administration. Among SSDI’s many problems are:

  • Inefficient, complicated, and sometimes detrimental adjudication procedures that cause decision delays and encourage rubber-stamping of benefit approvals;
  • Outdated rules and definitions that fail to account for the realities of today’s labor market and the accommodations available to help individuals with disabilities stay attached to the workforce;
  • Excessive wait times for a disability determination or appeal;
  • Non-existent or ineffective recovery and return-to-work assistance;
  • Work disincentives;
  • Lack of effective continuing disability reviews; and
  • Fraud and abuse.

Comprehensive SSDI reform should not only establish long-term solvency, but also correct the program’s many flaws and inefficiencies so that it can better serve disabled individuals. Effective reforms would emphasize recovery over dependence and focus benefits on poverty prevention rather than income replacement.

The moral challenge created by entitlement spending undermines the democratic system. The entitlement status quo makes more and more Americans dependent on the government, and the automatic nature of entitlement spending growth crowds out other priorities. Policymakers need to transform the entitlement programs away from unaffordable social insurance benefits for everyone regardless of need toward a real insurance model that provides a durable safety net for seniors, the disabled, and their families without bankrupting younger generations. Individuals must also provide for more of their foreseeable retirement and potential disability needs through personal savings and insurance. By right-sizing government and entitlement programs, Americans will have more money in their pockets to control their own futures. The steps explained below will ensure a fiscally sustainable future and better stewardship for younger generations.


Reforms to Control Entitlement Spending

Resist Tax Hikes. Many opponents of fundamental entitlement reform claim that raising taxes is a feasible approach to solving the entitlement crisis. This assessment is simply wrong. Projected deficits are large and growing, and raising taxes to pay for this spending would require doubling tax rates even for the lowest income brackets. Raising, or eliminating, the payroll tax cap would not solve Social Security’s financial shortfalls. It would impose economically damaging marginal tax rates on middle-income and upper-income earners. Such tax increases would reduce incomes and overall economic growth. And, without a “lockbox,” Congress would be free to spend temporary surpluses in other budget areas, as has been the case in the past. Such a policy would deal a devastating blow to the economy. The long-term obligations from entitlements require more than modest changes in the current system. The system should provide a more limited and durable safety net for today’s Americans while preserving the same opportunity and economic freedom they enjoyed for their children and grandchildren.

Adopt a Federal Budget Spending Cap. In order to motivate lawmakers to tackle entitlement reform, one promising approach would include all non-interest budget authority under one spending cap. This cap would include all discretionary and mandatory spending, except interest on the debt. Interest on the debt would be excluded because it depends in part on interest rates, inflation, and the maturity and structure of outstanding securities—factors largely outside Congress’s control. Lawmakers should adopt a statutory spending cap that encompasses all non-interest outlays and achieves budget balance, given current projections about the economy, revenues, and interest costs, by the end of the decade. Spending would then be capped at a level that maintains balance, allowing for certain annual adjustments. In the long run, during periods of normal economic activity and absent exigent national security demands, the spending cap should grow no faster than the U.S. population and inflation, similar to fiscal rules currently in place in many U.S. states. The cap should bind more stringently when debt or deficits exceed specific targets. Debt below 60 percent of GDP and deficits below 2 percent of GDP are commonly accepted as fiscally stable by a wide range of economists. Enforcement by sequestration would be necessary for such a spending cap to be effective at motivating lawmakers to adopt spending reforms that eliminate structural deficits in the U.S. budget.

Put Entitlement Spending on a Budget. Social Security, Medicare, and Medicaid are not subject to annual debate in Congress as part of the federal budget process. As the baby-boomer generation becomes eligible for Medicare and Social Security, and as Medicaid expands under Obamacare, costs are rising to alarmingly high levels. Congress should set a budget for each major entitlement, with an obligation to adjust the programs regularly, as necessary, to keep them within budget and protected from insolvency while ensuring that low-income Americans are protected from poverty. Congress should also reveal the projected cost of any proposed policy or funding level for each significant federal program over a long-term horizon so that lawmakers avert mounting long-term challenges.

Social Security Reforms

Index Social Security’s COLA to the Chained CPI. Social Security’s cost-of-living adjustment (COLA) is based on an outdated measure of changes in the cost of living that fails to account for how people react to changes in prices. Lawmakers should index Social Security’s COLA to the chained consumer price index (CPI), which acknowledges that people choose less expensive and different goods and services in response to changes in prices. This would more accurately protect the value of benefits against changes in the cost of living while improving Social Security’s finances.

Raise the Early and Full Retirement Ages. Since 1950, life expectancy at birth in the United States has increased by more than 10 years, while life expectancy at age 65 has increased by more than five years. At the same time, work in the United States has become less physically demanding and individuals have become healthier. Yet Social Security’s full retirement age will gradually increase by only two years—to 67—by 2027, and the early retirement age has not increased at all. Social Security’s retirement age serves as an implicit guideline for actual retirement, as nearly two-thirds of eligible workers choose to receive Social Security benefits between the early and full retirement age. For Social Security, this means greater financial strain, and for the economy, it means a smaller workforce, lower economic growth, less retirement security, and lower revenue. Lawmakers should gradually and predictably increase the early and full retirement ages to 65 and 70, and then index both to increases in life expectancy.

Pursue an Anti-Poverty Benefit. Congress should put Social Security benefits on a schedule to gradually arrive at a flat payment structure for eligible beneficiaries. This flat benefit payment should be sufficient to keep eligible seniors out of poverty throughout their retirement, and Congress should consider limiting the benefit to those who need it.

Reduce Taxes to Enable Personal Choice. Coupled with tax reform that phases out the payroll tax, a flat, anti-poverty benefit targeted at those who need it would limit Social Security’s role to real insurance and ease the future tax burden on American workers. Lower payroll taxes would enable more Americans to accrue personal savings in private retirement accounts to complement Social Security’s flat benefit and reduce Americans’ reliance on government in retirement. Moreover, because savings invested in the productive sectors of the economy accrue larger returns than what most Americans can expect to receive from their Social Security payroll taxes, Americans would be able to accrue larger retirement savings or devote less of their incomes to retirement savings while still maintaining current benefit levels.

Some workers may choose to consume more, earlier in life, and others may choose to consume more, later in life. These choices should be equally respected. It is not the proper role of the federal government to determine and mandate the level of consumption for workers in retirement. A flat, anti-poverty benefit would protect all eligible workers from poverty and would allow workers to choose how much, when, and how they prefer to save for retirement.

Disability Insurance (DI) Reforms

Adopt a Needs-Based Period of Disability. Congress should supplement permanent benefits and continuing disability reviews with a needs-based period of disability of one to two years for individuals for whom medical improvement is expected, and of two to five years for individuals for whom medical improvement is possible. Beneficiaries for whom medical improvement is not expected would continue to be subject to continuing disability reviews, as is the case in the current system.

Implement a Flat Benefit. Replacing the current progressive benefit structure with a flat benefit that is linked to the poverty level would lift millions of disabled individuals and their families out of poverty and better accomplish SSDI’s purpose of poverty prevention. Individuals who currently receive SSDI benefits would continue to receive their same benefit checks. Those who are already disabled do not have the ability to increase their savings or to purchase private insurance, so they should not be subject to changes in benefits. A flat benefit could be implemented relatively quickly, however, for all new SSDI applicants and beneficiaries. A predictable, flat benefit at the poverty level would also encourage those most able to purchase private DI coverage to supplement SSDI. Moreover, a flat, anti-poverty benefit would eventually generate savings in excess of SSDI’s shortfalls, allowing for a reduction in payroll taxes that could be applied, in part, towards private DI.

Encourage Greater Private Provision of Disability Insurance. Policymakers should consider offering employers a payroll tax credit in exchange for providing private disability coverage to their workers. Private coverage offers:

  • A faster, fairer, and more efficient adjudication process;
  • Assistance and accommodations that can keep workers on the job and help more return to work;
  • More effective screening and monitoring to weed out fraud and abuse; and
  • Lower costs.

Extending these private-sector benefits to the public program through optional employer-provided coverage could generate significant savings for the program and provide far better outcomes for the disabled.

Eliminate Non-Medical Factors in the Determination Process. The Social Security Administration’s current medical-vocational grid rules allow individuals to receive SSDI awards based on factors other than mental or physical disabilities, such as age, education, skill, and ability to speak English. These grid rules play a large role in disability determinations as they come into play in 40 percent of all awards. These non-medical factors alone cannot cause disability. The Social Security Administration should eliminate the grid rules and rely exclusively on physical and mental factors when making disability determinations.

Facts and Figures

FACT: Social Security is running growing deficits that threaten steep, automatic benefit cuts.

  • Social Security began running deficits in 2010, and its combined trust funds will be exhausted by 2034.
  • The OASI trust fund is projected for exhaustion in 2035, at which point beneficiaries will see about a 23 percent cut in benefits if Congress and the President fail to enact meaningful entitlement reform soon.
  • Congress authorized a $150 billion transfer from OASI to the disability insurance program in the 2015 Obama–Boehner budget deal to stave off DI trust fund depletion.
  • The DI trust fund is projected to be exhausted again in 2028 (instead of 2016). If policymakers fail to enact significant reforms before then, benefits would be cut by about 7 percent in 2028.

FACT: Social Security’s unfunded obligations are massive and growing.

  • In net-present-value terms, Social Security has promised more than $14 trillion in unfunded benefits than it will receive in taxes over the next 75 years.
  • In reality, Social Security trust fund assets represent unfunded obligations for American workers because Congress spent every single penny in previous payroll tax surpluses and left nothing more than statutory IOUs behind.

FACT: Social Security Disability Insurance has grown into a long-term unemployment and early retirement program.

  • Despite health gains and technological improvements, SSDI rolls have been rising for decades. Since 1990, the percentage of the working-age population that receives SSDI benefits more than doubled from 2.3 percent to 5.1 percent.
  • A study by the Federal Reserve Bank of San Francisco found that roughly half of the increase in SSDI beneficiaries is the result of demographics, such as increased labor force participation of women and the aging baby-boomer population. However, half the growth—roughly 3 million SSDI beneficiaries with about $42 billion in benefits—is more likely the result of greater accessibility to benefits and a higher relative value of benefits.

Selected Additional Resources

Charles Blahous, “The End of Social Security Self-Financing: What Does It Portend for Social Security’s Future?” Mercatus Research Paper, October 10, 2012.

Romina Boccia, “How Social Security Works in 2014,” Heritage Foundation Backgrounder No. 2906, April 28, 2014.

Romina Boccia, “Private Disability Insurance Option Could Help Save SSDI and Improve Individual Well-being,” Heritage Foundation Backgrounder No. 3037, July 20, 2015.

Romina Boccia, “Should the Retirement Age Go Up?” Heritage Foundation Commentary, October 26, 2015.

Romina Boccia, “A Social Security Primer for the New Administration: Reform Needed Now,” Heritage Foundation Backgrounder No. 3186, January 31, 2017.

Romina Boccia, “Social Security Disability Insurance: Benefit Offsets Encourage Work—But Achieve Little to No Savings,” Heritage Foundation Backgrounder No. 3032, July 15, 2015.

Romina Boccia, “What is Social Security Disability Insurance? An SSDI Primer,” Heritage Foundation Backgrounder No. 2994, February 19, 2015.

Rachel Greszler, “Disability Insurance Fails Short-Term Solvency Test Even After Transfer from Social Security,” Heritage Foundation Backgrounder No. 3147, October 4, 2016.

Rachel Greszler, “Improving Social Security Disability Insurance with a Flat Benefit,” Heritage Foundation Backgrounder No. 3068, October 23, 2015.

Mark J. Warshawsky and Ross Marchand, “Modernizing the SSDI Eligibility Criteria: A Reform Proposal That Eliminates the Outdated Medical-Vocational Grid,” Mercatus Working Paper, April 28, 2015.