Iceberg ahead!

The Trustees of the Social Security trust fund issued their 2025 annual report and the news is getting worse. If nothing is done, Social Security benefits will need to be reduced by 23% in 2033, nine months earlier than previously projected.

The trust fund outlook worsened for three reasons. First, provisions preventing government retirees from receiving full Social Security benefits on top of their government pensions were repealed at the start of 2025. Second, changes were made to expected fertility rates. Third, the percentage of GDP accruing to workers was reduced.

The options for avoiding the 2033 iceberg are obvious. Reduce benefits. Raise taxes. Or both.

Raising the retirement age is a favorite go-to for reducing benefits. Depending on birthdate, the current age for full benefits is about 67 years old. If the retirement age was raised by two months per year until it reached age 69, the shortfall would be cut in half.

Another option is means-testing benefits. Retirees with higher levels of non-Social Security income would see their benefit payments reduced or eliminated.

Benefits could also be reduced by shrinking or eliminating the annual inflation adjustment.

One way to raise revenue would be to increase the tax rate for Social Security contributions. Currently, employees pay 6.2% of income in Social Security and disability tax with their employers paying another 6.2% on their behalf. The self-employed pay 12.4%. These amounts are paid on the first $176,000 of income.

If enacted today, an increase in the Social Security tax rate to 15.8% would ensure solvency for the next 75 years. If enacted in 2033, the rate would have to increase to 16.6%.

The amount of income subject to Social Security tax could be raised. Some have proposed taxing the first $400,000. Others propose taxing the first $176,000 plus everything above $400,000. Still others propose taxing all income, regardless of amount. However, changing the cap alone will not eliminate the funding shortfall.

The conundrum is devising a solution that will keep Social Security solvent and popular. Social Security is sold as a system where workers pay in throughout their careers. At retirement, their contributions, their employer’s contributions plus all the interest on those contributions comes back to them.

Raising the tax rate or retirement age without changing benefit formulae risks alienating younger workers who fear that they will never receive the money they are owed.

Eliminating the income cap or means-testing benefit payments destroys any semblance of proportionality between contributions made and benefits received. If Social Security is seen as a program for the poor, it will inevitably become, as former Secretary of what was then the Department of Health, Education and Welfare Wilbur Cohen observed, “a poor program.” Destroy proportionality and watch the better-off demand the right to drop out in favor of privatization.

When Social Security was in dire straits in 1983, Republicans and Democrats came together to raise the retirement age, tax some Social Security benefits and delay a cost of living adjustment.

A bipartisan solution combining elements described above could happen again. But don’t hold your breath.

Jeffrey Scharf welcomes your comments. Contact him at jeffreyrscharf@gmail.com