Lawmakers are Running Out of Time to Fix Social Security
Last Updated January 14, 2025
As the single largest spending program in the federal budget, it is essential that Social Security can continue to serve its critical mission of supporting millions of Americans in retirement and with disabilities. Unfortunately, without reform, the combined Social Security trust funds will be depleted in 2035, at which point program benefits would be reduced by 17 percent.
The warning bells have been chiming for years as Social Security’s finances have continued to deteriorate. An increasing number of Americans have become eligible for Social Security, while at the same time, the ratio of workers paying into the program per retiree has decreased. Instead of waiting for a crisis to unfold, there is still time to make forward-looking, gradual adjustments to the program that give all Americans time to plan and prepare — but only if lawmakers act soon.
Social Security’s Funding Gap Has Grown Over Time
Social Security is comprised of two trust funds:
- The Old-Age and Survivors Insurance (OASI) Trust Fund, which supports retirees, their survivors, and their dependents
- The Disability Insurance (DI) Trust Fund, which pays benefits to eligible individuals (and certain family members) who are unable to work due to medical conditions.
The combination of the two trust funds is referred to as the OASDI Trust Fund.
The main reason the outlook for Social Security has deteriorated over the last two decades is the nation’s changing demographics. The aging population has put pressure on the program as more people have become eligible for Social Security. In 2010, there were 43 million people age 65 and older; by 2024 that amount had increased to 59 million people. At the same time, the number of workers contributing to the program has declined — from 2.9 covered workers per beneficiary in 2010 to 2.7 in 2024. The mismatch between beneficiaries and covered workers means fewer workers are contributing to the program at the same time that spending for beneficiaries continues to grow rapidly.
One way to measure the solvency of the program is by the Social Security funding gap, which is the average amount of income needed during the next 75 years in order to make the OASDI Trust Fund actuarially sound. In 2010, when the first wave of baby boomers began turning age 65, the actuarial deficit totaled 1.9 percent of revenues from the payroll tax. By 2024, that deficit had increased to 3.5 percent of taxable payroll — an 84 percent increase compared to 2010. The more time that passes without reform, the greater that deficit will accumulate.
Changes to Revenues or Spending
Revenues
To bring in more revenues for the program, lawmakers could change the payroll tax rate or broaden the taxable base. If they had taken action in 2010, when the baby boom generation started turning age 65, the financial standing of Social Security would not be in the same kind of jeopardy it is in today.
Raise the Payroll Tax Rate
The OASDI Trust Fund is primarily financed by a 6.2 percent payroll tax levied on both employers and employees, which has been set at that rate since 1990. In 2010, gradually raising the payroll tax rate by 0.1 percentage points beginning in 2016 until it reached a combined rate of 14.4 percent could have resolved nearly three-quarters of the long-run actuarial shortfall. If lawmakers chose the same option today and the rate was raised to similar levels beginning in 2030, it would eliminate just 43 percent of the funding gap.
Eliminate the Taxable Maximum
Another option to raise revenues for Social Security is to eliminate the Social Security tax cap. Currently, workers only pay Social Security tax on the first $168,600 of income. The index formula for the taxable maximum has not changed since 1989. When payroll taxes for Social Security were first collected in 1937, 92 percent of earnings from jobs covered by the program were below the maximum taxable amount. By 2022, that number had decreased to 83 percent of earnings. Had lawmakers mandated that all earnings were subject to the payroll tax and credited them for benefit purposes in 2010, 99 percent of the funding gap would have been eliminated. If the same reform option began in 2025, it would close 53 percent of today’s gap. Enacting the policy in 2010 would have gone almost twice as far in eliminating the funding gap than if the same option were enacted today.
Spending
Lawmakers could also modify benefit payments in order to sustain the longevity of Social Security. Some common options include changing the way benefits are indexed over time, reducing benefits for high-earners, and raising the retirement age.
Grow Initial Benefits with Prices Instead of Wages
The option that would generate the most savings is to grow initial benefits with prices instead of wages. Currently, Social Security benefits are based on average lifetime earnings with the idea that a worker’s future benefits reflect the general rise in the standard of living during their working years. An alternative, often called pure price indexing, would base benefit payments on inflation-adjusted wages. As a result, increases in average real wages would not result in higher real benefits. Linking benefits in that way would have closed more than the entire 75-year funding gap in 2010 (131 percent of it), but would close 85 percent of today’s gap.
Reduce Initial Benefits for High-Earners
A prospective retiree’s initial monthly retirement benefit, or primary insurance amount (PIA), is calculated using a three-tiered formula based on an individual’s average indexed monthly earnings. For 2024, the PIA three-tiered calculation takes into account 90 percent of the first $1,174 monthly earnings, 32 percent of earnings between $1,175 and $7,078, and 15 percent of the earnings over $7,078. Adjusting the points to reduce the PIA for high earners (while maintaining current-law benefits for earners at the 60th percentile and below) would reduce Social Security spending. If this policy had been implemented in 2010, 33 percent of the funding gap would have been reduced. Today, 25 percent of the funding gap would be covered.
Raise the Retirement Age
The full retirement age (FRA) is the point at which an individual is eligible for their full Social Security benefits. The last time Congress legislated an increase in the FRA was in 1983, which increased the age from 65 to 67 and phased in that increase over the course of 22 years. That phase-in recently ended and now the FRA is static at age 67 for individuals who reached the age of 62 in 2022 or later. If, in 2010, lawmakers had indexed the FRA by 1 month every two years (to mirror the increase in overall life expectancy) until the FRA reached age 70, 32 percent of the funding gap would have been closed. Raising the FRA to age 69 for those age 62 in 2036 and indexing in the same manner today would close a bit more of today’s gap (38 percent).
Conclusion
Social Security’s finances are worsening, and lawmakers are running out of time to fix it. Nearly every year, the depletion date of the OASDI Trust Fund draws closer, and in just 11 years the combined trust fund will become insolvent, meaning potentially devastating benefit cuts for millions of Americans. While it would have been better for lawmakers to have acted earlier to shore up this critical program, options still exist — likely a combination of both raising revenues and reducing spending — to secure the trust funds. The longer lawmakers wait to act, though, the more abrupt and difficult the changes will be to implement.
Photo Credit: Veronique D/Getty Images
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