Social Security has 6 years left. The fix that sounds cruelest may be the smartest
Social Security is six years away from bankruptcy. This is not a prediction buried in an actuarial footnote; That’s the opening finding of a new report from the Penn Wharton Budget Model (PWBM) released Thursday that predicts the program’s Old-Age and Survivors Insurance Trust Fund will start drying up by 2032.
And the initial solution that lawmakers reach for (raising taxes) may be the wrong move, certainly.
This is the definitive and counterintuitive conclusion put forward by PWBM researchers. Seoul Ki “Sophie” Shin And Kent SmettersModeling five different reform packages, ranging from all taxes to all cuts, he found that the approach most traditional analysts dismiss as politically radioactive—deep benefit cuts—created the strongest long-term economic growth.
Put the numbers through a standard accounting lens and the tax-heavy plan called Option A looks like the winner. It delays bankruptcy from 2032 to 2058 by raising the payroll tax rate by one percentage point (to 13.4%), raising the taxable earnings cap to $250,000 (from $184,500 in 2026), and switching to a slower inflation index for cost-of-living adjustments.
Switch to dynamic economic modeling (the kind that tracks how people actually change their saving and work behavior in response to policies) and the picture changes. Option E, the most aggressive benefit-cut plan (no new taxes, deeper formula cuts, and raising the retirement age to 69), calls for a 6.1% GDP increase by 2060 and a 13.5% increase in private capital. Option A, the tax-heavy plan, produces only a 2.4% increase in GDP and a 4.4% increase in private capital over the same period.
The mechanism is pretty simple: Tell Americans their Social Security checks will be smaller and they’ll save more on their own. Smetters and Shin call this “savings incentive.” More private saving means more capital is available for productive investment, which increases wages. By 2060, wages are projected to be 5.7% higher under Option E, but only 1.6% higher under Option A.
Smetters told Luck His purpose in this exercise is not to make recommendations, but instead to show “a range of options.” He added that if he had to guess, most people would prefer Option C, which is somewhere in the middle, but left that to the political process. Its mission is to “show the trade-offs between a wide range of options on an unbiased, holistic basis.”
But for critics who argued that the math in this analysis was cruel, it offered the perspective that the most draconian approach is probably the one on the books under current law, which would cut benefits immediately in just six years. This would mean a $2,500 to $2,700 annual cut in benefits for a person retiring within seven years, while PWBM’s harshest scenario, Option E, would reduce benefits by $2,300 per year (for women) and $2,500 per year (for men).
