Social Security to go broke in 10 years, forcing Washington’s hand on retiree crisis

Social Security’s trust fund insolvency is looming in Congress’ windshield now that the Congressional Budget Office has reported that it will run out of money in 2032.

That places Social Security firmly in the 10-year budget window for the first time ever. It’s a somber milestone, turning something that had always been some future generation’s problem into a here-and-now reality.

CBO said inflation over the past year has tilted the program’s finances further out of whack, speeding up the exhaustion date of the Old-Age & Survivors Insurance Trust Fund, Social Security’s main program.

Under current law, the government can pay out only what comes in through payroll taxes if the fund is exhausted. CBO figures the tax revenue will cover only 80% of each check. That means an immediate 20% cut in payments to beneficiaries.

“There’s a sense in which doing nothing means benefits will go down for all beneficiaries,” CBO Director Phillip Swagel said.

The Old-Age & Survivors Insurance Trust Fund is the largest Social Security program and the one most people think of when considering Social Security. The agency also runs a disability insurance program with a separate trust fund.

The two are often combined for actuarial purposes.

Social Security has been running a cash-flow deficit since 2021. It has been dipping into the trust fund since then and putting it on track for exhaustion.

Robert L. Bixby, executive director of the Concord Coalition, a budget watchdog, said having a deadline pop up in Congress’ 10-year budget window is important.

“We’ve been talking about exhaustion of the trust fund as something that’s going to happen way off in the by-and-by. When it comes within the budget window, I think it’s more than symbolically important,” he said. “It also affects policy choices.”

The budget window is how Washington usually thinks about its finances. When the president or a lawmaker proposes a program or a change in tax policy, it is evaluated for its cost over 10 years.

Although Congress usually spends money one year at a time, it is supposed to write a budget each year looking 10 years into the future. The same goes for the budget the president submits to Capitol Hill.

This year, any budget would have to grapple with the new Social Security reality, Mr. Bixby said.

“From a policymaking point of view, if you’re writing a budget right now, you’re going to have to put in that budget how do you prevent the trust funds from exhausting,” he said.

Other analysts suggest that the budget window shouldn’t matter.

Maria Freese, senior policy adviser at the National Committee to Preserve Social Security and Medicare, said acting sooner rather than later is always better but the 10-year budget window has no particular significance.

“Anytime you have an exhaustion date that is a near-term exhaustion date, whether it be inside the budget window or right outside the budget window, I don’t think that’s a particular factor,” she said.

Ms. Freese said CBO’s calculations tend to be more pessimistic than Social Security’s actuary and the current economic turmoil makes any projections for a decade out particularly fraught.

CBO acknowledged the uncertainties in its 2022 report.

The agency pegged the exhaustion date to 2033, just outside the 10-year window.

Two things have changed. First, the ticking of the clock has advanced the budget window a year. So even if nothing changed, the exhaustion date would have been at the tail end of the budget window.

But something did change.

Inflation spurred the largest cost-of-living adjustment for benefits in four decades. Even though the inflation was coupled with a hotter economy producing more revenue, it couldn’t keep up with the bump in benefit payments, which are now built into the program’s baseline.

Congress has some kludges to fix the situation.

Lawmakers could pass a bill to decouple payments from the trust fund. That could require Congress to pay benefits at the full promised level no matter what the trust fund looks like.

That would upend the premise of Social Security and make it more akin to a welfare program. Social Security is supposed to be a sort of public pension program that gives back benefits to workers commensurate with what they have paid into it.

Other options include trying to prolong the trust fund by raising taxes or cutting benefits.

Sen. Bernard Sanders, Vermont independent, joined a group of Democrats in proposing a tax increase on incomes higher than $250,000. It would also apply the payroll tax to investment and business income.

The money would then be pumped into a $2,400-a-year increase in benefits plus a change in the cost-of-living adjustment formula.

Social Security’s actuary said the cash infusion would bring in $33.8 trillion over the next 75 years and the increased spending would total $12.8 trillion.

The result is an additional $21 trillion that would extend the trust fund’s solvency until close to the end of the century.

“Our job is to expand Social Security so that every senior in America can retire with the dignity that they deserve and every person with a disability can live with the security they need,” Mr. Sanders said.

Ms. Freese said Republicans have refused to countenance tax increases, which she calls the chief hurdle to any deal. She said there is no way to sweat out enough money any other way because benefits are meager as it is.

“There’s nothing you can do that is a big enough change that doesn’t hurt your average middle-income beneficiaries if you’re not going to raise taxes,” she said.

AARP, the nation’s largest seniors lobby, said something has to be done.

“Americans should be able to trust that our leaders in Washington will protect the Social Security benefits they have paid into and earned through a lifetime of hard work. AARP is encouraged to hear this commitment from leaders in both parties,” said Nancy LeaMond, AARP’s chief advocacy and engagement officer. “Americans deserve a full and open debate about securing the future of the benefits they count on and need. The stakes are too high for anything less.”

It’s not just Social Security that faces fiscal risks.

CBO projects that Medicare’s Hospital Insurance Trust Fund, also funded through payroll taxes, will be exhausted in 2033. That is an improvement from CBO’s 2022 report, which put the exhaustion date at 2030.