Say you’re a young or middle-aged person who isn’t planning to retire for at least 15 or 20, years. How much retirement income can you expect to collect from Social Security? Unlike your 401(k), which is subject to the uncertainties of the stock market, Social Security benefits are determined by a formula. But they’re vulnerable to a different, harder-to-measure kind of uncertainty: policy uncertainty. Social Security’s combined retirement and disability trust funds are projected to be depleted in 2035. At that point, payroll tax revenue will be sufficient to cover only 80 percent of the benefits promised by these programs. So, your anticipated retirement income depends on what you expect to happen at that point.

If you were to look at current law, you’d see that when the trust fund is exhausted, benefits must be cut to bring them in line with revenue. But you might also—sensibly—guess that such a large benefit cut for current beneficiaries will be politically unacceptable. Working backwards, you can therefore expect lawmakers to change current law before the trust fund runs out. Maybe lawmakers will protect current beneficiaries in part by phasing in even more drastic benefit cuts for future beneficiaries, including you. Maybe your benefits won’t be cut, but you and future generations will have to pay higher taxes to receive the same level of benefits (effectively lowering your rate of return). Maybe neither your benefits nor your taxes will change, and policymakers will borrow money to pass the burden—and tough decisions—to future generations. Unfortunately, despite knowing about the impending trust fund depletion for decades, policymakers still haven’t figured out how they plan to deal with it.

This policy indecision is the topic of R. Douglas Arnold’s 2022 book, Fixing Social Security: The Politics of Reform in a Polarized Age. In it, the author addresses two important questions. First, why have lawmakers thus far failed to address Social Security’s financial shortfall, despite having ample warning? Second, what action are they likely to take as the trust fund approaches depletion?

Social Security History

Arnold lays some groundwork by presenting a history of the Social Security retirement program, starting with its creation under the Social Security Act of 1935. Although President Franklin D. Roosevelt’s proposal to fund benefits in advance, by building up a trust fund, proved to be politically unsustainable (“few legislators favor extracting revenue from taxpayers sooner than necessary”), the program itself held together and grew in popularity thanks to its dedicated funding source, the payroll tax. This feature created a perception that people had (in the words of President Roosevelt) “a legal, moral, and political right to collect their pensions” even though the system was run on a pay-as-you-go basis (i.e., revenue from current workers was used to fund benefits for current seniors). Over the next several decades, expansion of the increasingly popular program—made possible by favorable demographics and economic growth—was “delightful for legislators” from both parties. 

But Social Security’s pay-as-you-go financing became unsustainable during the 1970s, and addressing the program’s shortfall, predictably, created conflict and partisan bickering. In 1977, Congress voted to raise payroll taxes. But financial difficulties reemerged shortly after, resulting in a 1983 reform that included both tax increases and benefit cuts. Notably, both the 1977 and 1983 reforms occurred during non-election years, in contrast to prior expansions, most of which occurred during election years.

The 1983 reform resulted in the buildup of a substantial trust fund, changing the nature of the system from purely pay-as-you-go to partially funded (i.e., a portion of current workers’ taxes were set aside to pre-fund their retirement). A key rationale here was improving “intergenerational equity by making boomers part of the solution to their own demographic bulge.” However, the reform didn’t go far enough, and shortfalls have emerged yet again. By today’s projections, the trust fund will be depleted in 2035. No major action has been taken on Social Security since 1983, although there has been periodic public discussion of reform options—perhaps most notably the contentious discussion of President George W. Bush’s reform proposal based on individual accounts.

Pension Design and Reform Options

A second piece of groundwork in the book is a comprehensive discussion of pension system design and reform options. Arnold describes two models for pension design. The individual responsibility model relies on people “as free citizens to plan for their own future.” In contrast, the social insurance model relies on public programs, recognizing that “many people are not good savers for distant goals” and “some people never earn enough during their working years to save for an adequate retirement.” The former model gives rise to market-based reform plans, while the latter emphasizes preserving traditional Social Security. 

I’d characterize the choices somewhat differently. In my view, there are three important design questions in a pension system. First, to what extent should people be forced, or “nudged” (via automatic enrollment), to set aside money for retirement and annuitize their savings upon retirement? Second, how much intra-generational redistribution should there be (i.e., what should be the link between a person’s benefits and contributions)? Finally, how much advance funding of benefits should there be? 

Arnold’s individual responsibility vs. social insurance framework combines the first two questions, while I think it’s worth considering them separately. You could support forced (or automatic) saving and annuitization, with no redistribution, by having the saving occur in individual accounts. You could also limit investment choices to diversified mutual funds, as the typical employer-sponsored defined contribution plan does. That’s how the individual-account components of market-based reforms are often designed: they reflect individual responsibility in funding one’s retirement but not necessarily in planning for it. (Most of these market-based plans do also include a traditional Social Security component, which involves redistribution.)

Similarly, you could support advance funding with varying degrees of redistribution. You could even support individual accounts without advance funding. For example, some countries have notional individual account systems in which current contributions finance current benefit payments; but each person’s contributions, augmented by a rate of return, are stored in a ledger (a notional account), and disbursed upon retirement.

Regarding the second question, it’s worth noting that there is considerable redistribution in the Social Security program, so the notion of earned benefits is somewhat of a fiction. The program applies a progressive formula to lifetime earnings to arrive at a monthly benefit, which is paid for life. Spousal and survivor benefits are also available. This approach generates a great deal of redistribution, some intended (e.g., from those with high earnings to those with low earnings) and some probably unintended (e.g., from singles and two-earner couples to one-earner couples, from smokers to non-smokers). 

Arnold notes that the private retirement system (employer-sponsored pensions and individual retirement accounts) also involves redistribution, in this case towards the higher-income individuals who get the most value from the fact that investment returns in these plans are tax-free. I’d push back here. Exempting investment returns constitutes a tax expenditure—essentially, spending through the tax code by carving out a tax break—if compared to a comprehensive income tax, which would tax investment returns. However, it doesn’t constitute a tax expenditure if compared to a comprehensive consumption tax, which would not tax investment returns. Given that the current federal tax system is a hybrid of an income and a consumption tax (some investment returns are taxed while others aren’t), it’s not obvious that an income tax is the right benchmark.

Politics and Predictions for 2034

Returning to Social Security’s imminent insolvency, why haven’t legislators acted yet? After all, the program’s actuaries have been projecting trust fund depletion for decades. An obvious answer is the short-term nature of politics: “insolvency is a long-term problem without short-term consequences.” If 1977 and 1983 are a guide to the future, we shouldn’t expect action until 2035. Arnold further argues that the buildup of the trust fund following the 1983 reform has facilitated this procrastination “by shielding legislators from the reality that tax revenues have been insufficient to support Social Security benefits since 2010.” 

That leaves the question that should be on the minds of young and middle-aged workers planning for retirement: what will happen as 2035 approaches? Here, Arnold skillfully lays out the competing pressures on lawmakers. A range of polls show that people of all ages, and both parties, like and support Social Security. They also indicate willingness to tolerate modest increases in payroll taxes and the full retirement age (which amounts to a benefit cut) to restore solvency. Within the Republican party, there is pro-market pressure not to increase taxes (indeed, many legislators have pledged never to do so), and to instead achieve solvency by cutting benefits, particularly for those with higher incomes. But there is also populist pressure not to cut benefits, as reflected in a campaign promise by President Donald Trump. Within the Democratic party, there are pressures from progressives who want to increase Social Security benefits and pay for it by increasing taxes on high-income individuals. However, those high-income individuals also tend to live in Democratic districts. 

Many Democrats have signed on to the Social Security 2100 Act, which increases benefits for many people and raises taxes, primarily on high earners. Arnold summarizes a 2019 version of this bill, which, commendably,  fully restores solvency. Unfortunately, the new version of this bill doesn’t go nearly as far and may even worsen solvency if benefit increases are made permanent. Regardless, Democrats are unlikely to be able to pass a bill without Republican support. Arnold argues that, to have a reasonable chance at a bipartisan solution, Republicans need to develop their own plan as a starting point, and they have not done so. He correctly points out that “decades of procrastination” have been “particularly damaging to the Republican antitax cause” given that any benefit cuts would likely need to be phased in slowly.

Arnold suspects that personal accounts are unlikely to be part of any last-minute solution. I agree. Personal accounts don’t have any impact on solvency, although they may make reform more palatable. Moreover, a phased-in benefit cut as part of a compromise package, combined with measures that increase participation in tax-preferred retirement accounts (which have received bipartisan support and been implemented in several states), would have a similar impact and be less contentious. 

If policymakers wanted to kick the can in 2035, they could change the law to allow borrowing to keep benefits flowing without raising taxes. Given the general path of the federal government’s finances – not just due to Social Security but also Medicare and other health programs – it’s worth noting that this option assumes that investors are still willing to lend to the government at reasonable interest rates. For what it’s worth, my prediction is lawmakers will kick the can. (That’s a prediction, not a recommendation.) 

As I read this book, I found myself thinking about the intergenerational politics of Social Security. Once people have started paying taxes, they have a stake in the system, and they are likely to be willing to support higher taxes or borrowing to preserve benefits (as polls suggest). Future generations may have a different perspective, but they can’t vote or respond to polls yet. There’s an analogy to environmental issues: many adults alive today express concern about the hardship caused by high gas prices. Future generations, who suffer from the climate change caused in part by excessive gas consumption, may disagree. 

Overall, this book is a worthy contribution to the Social Security discussion. If you work in this space, you should read it. Whether you agree or disagree with Arnold’s takes, you’ll get insight from the political analysis, and you’ll find yourself empathizing with his frustration about continued political inaction on this issue. In a recent study, my co-authors and I estimated that 25-year-olds would be willing to pay as much as two months of earnings simply to know in advance what will happen when the trust fund is depleted. That’s purely the cost of policy indecision, above and beyond any direct costs needed to fix the program. For the sake of these young people, let’s hope this book and others like it help to spur action.