Retirement & Financial Planning Report

The Social Security system is suffering from a “missing trust fund” and if the system is to continue paying benefits at their currently promised levels taxes must be raised, says a report that suggests several possible ways that could be done.

The report from the Center for Retirement Research said that the missing trust fund results from decisions decades ago to pay benefits in excess of what the system currently was taking in. As the report put it, “Specifically, the program’s “pay-as-you-go” approach – with the exception of the recent build-up and spend-down of a modest trust fund in anticipation of the baby boom – makes the program expensive. This financing approach is the result of a policy decision in the late 1930s to pay benefits far in excess of contributions for the early cohorts of work¬ers. The decision essentially gave away the trust fund that would have accumulated and, importantly, gave away the interest on those contributions.”

“Broadly, if policymakers wish to maintain current benefit levels, two ways exist to deal with Social Secu¬rity’s financial shortfall. The first is simply to raise taxes to replace the missing interest, roughly holding constant the present value of the missing trust fund going forward. To implement this approach, the revenue coming into the program would need to be increased permanently. An alternative approach would be to increase taxes by a higher amount but only temporarily, until a trust fund consistent with a fully funded program is built up. This buildup could be accomplished over a short time horizon with a larger tax increase or over a longer period with a smaller tax increase,” it says.

Under either approach, it said, there are several options for bringing in additional tax revenue. One would be to keep a limit on how much of income is taxable for Social Security purposes (currently $132,900 and rising only slightly each year) and increase the tax rate. Another would be to eliminate that cap. A third would be to increase income taxes instead, on the theory that the financial problem was created by a society-wide decision to pay some people far more than they had paid in, and therefore that the costs “should not be borne solely by workers through taxation of their earnings, but instead should include some taxation of capital income as well.”

It said that whatever approach is considered, “the real issue is that the cost implications of the missing trust fund are worth considering in any proposal to close Social Security’s financing gap.”