Q: Will the 8.7% COLA affect the solvency of Social Security?
A: TSCL thinks it might. Since 1975, the Social Security Administration has automatically adjusted benefits annually based on inflation. Rarely have prices ever soared as high as we have experienced over the past two years. Higher than expected inflation will provide higher than expected COLAs for more than 63 million beneficiaries in 2023. This increase in Social Security income provided by COLAs is permanent, meaning that program costs in future years will be significantly higher than previously forecast. That could potentially result in an earlier insolvency date.
Q: What level of COLA was previously forecast and what is the current Trust Fund insolvency date?
A: Social Security Trust Fund solvency estimates vary. The annual Social Security Trustees report released in early June of 2022 estimated that the combined Trust Funds would be depleted by 2035. Their “intermediate” or middle estimate of the COLA for 2023 was originally just 3.8%, dropping to 2.4% in subsequent years. But a few weeks after the release of the Trustees report, the Chief Actuary of Social Security adjusted the estimate for the COLA in 2023 saying “a COLA close to 8% is likely based on CPI-W trends….” Actuaries, however, have not released an updated Trust Fund solvency estimate.
The Congressional Budget Office (CBO), which uses different methodology to produce its estimates, in May of 2022 estimated that the 2023 COLA would be 6%, but also estimates COLAs averaging about 2.4% in subsequent years. The CBO estimated that the Social Security Trust Funds will become insolvent slightly sooner, in 2033.
A third estimate that TSCL is following closely is one by the Committee for a Responsible Federal Budget. According to their experts, if the COLA is at least 8.8% in 2023, and 3% in 2024, the Social Security insolvency date would be in 2033.
Q: That would still give Congress some time to fix Social Security, right?
A: Considering how difficult and how long it takes to enact major Social Security legislation on this scale — not that much time. Changes that would reduce benefits require as much time as possible in order to phase in changes, and to avoid deep cuts or disparities in benefits. Congress last passed major Social Security legislation in 1983. When the legislation passed, Social Security was just weeks away from being unable to pay full benefits. This was the case even though Congress had made changes to the benefit formula in 1977, cutting benefits of new retirees by as much as 20% for the first group affected by the changes. Like the situation today, the weakening financial position of the program was known to lawmakers throughout the 1970s.
Q: What would be involved in fixing Social Security for the long-term?
A: Congress would need to enact a plan that either cuts benefits, raises revenues, or some combination of both. Passing such a plan in an evenly divided Congress would not be easy. Passage of Social Security legislation requires a super majority in the Senate of 60 votes.
Q: What are some of the proposals that would cut benefits?
A: Three of the most widely discussed options include:
- Reduce the rate of growth in Social Security COLAs. This option would cut total retirement income of all Social Security recipients, current and future. Some proposals would simply cut the COLA by a fixed amount, such as by 1 percentage point. Other options would tie the annual inflation adjustment to a consumer price index that tends to grow more slowly than the currently used Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). These cuts are cumulative and would grow deeper the longer an individual is retired. Worse, it would not save that much for the program compared with the financial hardship it would cause. This has proven to be a widely unpopular proposal and one of the most contentious fought by TSCL for more than 27 years.
- Increase the retirement age. Currently individuals can start Social Security benefits as early as age 62, but benefits are permanently reduced for doing so, by as much as 30% depending on the year born. Age 67 is the age for full retirement benefits affecting those turning 62 in 2022. Proposals would gradually increase the age for full benefits, but those who would not be able to work and wait until full retirement age would see even deeper reductions for taking benefits sooner. This proposal has little support from current retirees.
- Change the benefit formula. The Social Security Administration uses the highest 35 years of earnings to calculate one’s retirement benefit. Proposals would require a higher number of years, such as 40, which would reduce most beneficiaries’ average annual earnings and the size of his or her monthly benefit. This would tend to impact women more negatively than men, since women often have shorter work histories. Women are out of the work force periodically for child birth, raising families, and often to provide care for aging and disabled family members.
Q: What are the most discussed proposals to raise revenues?
A: Two of the most discussed proposals to strengthen Social Security’s revenues include:
- Increase the amount of wages subject to the Social Security payroll tax. In 2022, CEOs earning several million in wages pay the same amount of Social Security payroll taxes as workers earning less than $147,000. An individual earning $2 million a year fulfilled their payroll tax obligation and stopped paying into Social Security the first work month of this year. The average worker however, is still seeing payroll taxes withheld in the December paycheck. TSCL surveys have consistently found that majorities of survey participants favor this change.
- Increase the payroll tax rate. Under current law, the payroll tax is 12.4%, 6.2% paid by the worker and 6.2% matched by the employer. Proposals would very gradually phase in small increases of .02 percentage point, for example, over several years to bring the percentage up to a 14.4%.