by Mitch Kokai
Senior Political Analyst, John Locke Foundation
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. …
… 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.