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How to Pay for Social Security’s Missing Trust Fund?
Source: Center for Retirement Research

Social Security’s Trust Fund is projected to run out in 2034.  As policymakers consider restoring financial balance to the program, one topic that may be discussed is how to structure any tax increases.  Understanding why Social Security requires a higher payroll tax than a funded retirement program for a given level of benefits is a crucial first step in informing this discussion.  The current “pay-as-you-go” approach is the result of the policy decision made decades ago to pay benefits far in excess of contributions for early cohorts of workers.  By paying benefits in excess of contributions to early cohorts, the nation essentially gave away the Trust Fund that would have accumulated and, importantly, gave away the interest on those contributions.  Thus, the payroll tax must cover not only the required contribution but also the missing interest.  This paper addresses alternative ways to pay for this Missing Trust Fund, including a comparison of the size of the required changes and their distributional implications.

 

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