Social Security is hurtling towards insolvency and addressing this issue will be crucial in the years to come. Its combined trust fund is expected to run out of money in 2035, so benefits will be cut automatically if Congress doesn’t act.
Proposals have included tax hikes, cutting benefits for high earners, raising the retirement age, or even doing away with the tax deductibility of the 401(k).
But there could be a different — and much simpler — solution.
“Is it really possible that we can fix this massive program that’s quickly running out of money — and fix it without raising taxes or cutting benefits? Well, I’m here to tell you it’s possible,” said Devin Carroll, a retirement expert, in a YouTube video shared earlier this year.
He cited a CATO Institute blog from 2023 that says, “Social Security benefits are growing too fast. And this excessive benefit growth is one of the key reasons the program is unsustainable … benefits are growing much faster than inflation.This is by design. And the difference is sizable.”
“So what was once created as an anti-poverty program has now become a program that redistributes more than $1 trillion from Americans who are working to Americans who are retired,” said Carroll, pointing out that many of the wealthy couples he works with are together collecting $70,000 a year or more in benefits.
According to Cato, it all comes down to a simple tweak.
“… there is a solution that would be a win-win for everyone,” said Carroll. “All it requires is a simple change to the way inflation is calculated.”
The root of the problem
To keep up with inflation, the Social Security system uses two measures: wage inflation (as measured by the Average Wage Index) and price inflation (as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
Workers’ initial benefits are indexed to wage growth. Their future benefits are indexed to price growth. This has been the case since 1977 when the Social Security Administration changed the calculation method that only used price inflation for adjustments.
The problem, Carroll explained, is that in most years since 1978, wages grew faster than prices.
“And if we average this out, wages have grown at an average of 4.28% per year and prices have grown at an average of 3.59%,” said Carroll, adding that “even a small difference in a growth rate over a long period of time can make a big difference.”
Cato crunched the numbers to show that two people who claimed Social Security 15 years apart, but earned the same and contributed the same payroll taxes to Social Security over their lifetimes, would receive wildly different benefits in present day due to wage indexing.
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So what’s the tweak?
One policy solution is to tweak the benefit formula to adjust initial benefits to price inflation, rather than growth in average wages. But could such a small tweak make much of a difference in the longevity of the Social Security trust fund?
According to the Social Security Trustees, that tweak — if it was implemented in 2029 — would close 80% of the program’s funding gap over the next 75 years, and in its 75th year, actually lead to a surplus. This would impact anyone who’s younger than 57 right now, according to Carroll who published his video in March, and not those who are already collecting benefits.
“Adopting price indexing for initial benefits would preserve current benefits and protect beneficiaries from inflation, while reducing excess benefit cost growth,” according to the Cato Institute blog.
They say progressive price indexing — in which this tweak would be limited to the highest 70% of earners — would still close the program’s 75-year funding gap by 45% and, in the 75th year, achieve near-solvency, according to the Cato Institute.
“So not only would this fix the program, it would ensure that it was there for future generations,” said Carroll. “And the best part is that it wouldn’t require any tax increases or benefit cuts,” although he adds that some people may consider slowing the growth in benefits a “cut.”
“This is a common-sense fix that may reduce benefits slightly for people way down the line,” he said, “but it will also ensure that they actually get a benefit.”
