Key Points
With nearly 90% of Americans aged 65 or older relying on Social Security benefits to cover everyday expenses, cutting benefits has long been off the table. In fact, Social Security is often referred to as the “third rail of American politics.” Politicians know that if they touch it, they risk their careers.
According to the latest Social Security Trustees Report, the Old-Age and Survivors Insurance (OASI) trust — the fund helping to support today’s retirees — will run dry by 2032 unless Congress steps in. Legislators have been kicking the Social Security can down the road for years, hesitant to take a stand, but waiting any longer to seriously address the problem will only magnify it. Here’s why.
Deteriorating financial health
Congress has known for 42 years that, without changes, Social Security would become insolvent — and yet, nothing has been done. Now that insolvency is six years away, no one denies that reforms are necessary. Whether those reforms involve increasing the tax cap beyond $184,500, gradually pushing back the full retirement age, or means-testing for high earners, failure to implement them will exacerbate the financial shortfall. The larger the shortfall, the more drastic measures lawmakers will have to take later.
Economic implications
While some in Congress refer to Social Security as an “entitlement,” most retirees see it differently. After years of paying into the system through payroll taxes, many view the program as an earned benefit factored into their retirement plans. Cutting those benefits by an estimated 24% will affect not only recipients but also the broader economy.
Reducing Social Security benefits by 24% would result in the loss of $345 billion, or 1.1% of the GDP. The states hardest hit by GDP losses will include West Virginia, Mississippi, Vermont, South Carolina, Maine, Michigan, Montana, Arkansas, Alabama, and Idaho.
Every dollar of Social Security benefits spent in the U.S. supports $2 of economic activity. If benefits are cut, that would quickly translate to lower sales for local retailers and service businesses. Seniors are likely to cut back on how often they visit the dentist or their doctors to avoid healthcare expenses. And local governments would have to deal with the fallout from business closures, higher unemployment, stagnating property values, and reduced income to cover public safety costs.
Future generations
Delaying Social Security reform may severely impact younger generations, who will face a less reliable system than their parents and grandparents. If reforms are delayed, today’s younger workers could face higher taxes and lower benefits, creating a sense of generational injustice.
The reality is that Congress can choose to work in a bipartisan manner and come up with fixes that may not make everyone happy but will extend the life and health of the Social Security system. Legislators managed to make the necessary adjustments to save the program in 1983 and can do so again — if the will is there.
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