Professor Peter Diamond, a Nobel laureate in economics, stated in his presidential address at the 2004 meeting of the American Economic Association that “many young economists and economics students say that they expect to get no benefits at all from Social Security. This expectation does not seem sensible to me.” He further stated the trust fund revenues from taxes and assets will not be enough to pay full benefits once the assets deplete and the only source is the tax revenue stream. This scenario requires legislative action to reform the system.

Diamond’s statements, almost 20 years ago, still hold true today as is evidenced by the 2023 Annual Status Report of the Social Security Administration (www.ssa.gov). Expecting gross domestic product and productivity growth of about 3% over 75 years, the projected actuarial deficit for the combined trust fund, Old-Age and Survivors Insurance (OASI), also known as Social Security, and disability insurance (DI) is 3.61% for the taxable payroll. The OASDI reserve depletion will be in 2034. The trust fund can pay full benefits until 2033, but disability insurance can pay full benefits until the end of 75 years. Thus, the long-term prospect for OASI benefits is not very promising.

One of the income sources of combined Trust Fund is 6.2% payroll taxes on employees’ earnings, up to a maximum of $160,200 in 2023, with the same percentage matched by employers. Self-employed workers pay all taxes themselves. Also, 40% of current beneficiaries pay income taxes on part of their benefits, and those tax payments go to the OASDI. In 2022, income of the trust funds from taxation of benefits amounted to $49 billion, in addition to the interest income of $66 billion from the accumulated reserves. The OASDI provides monthly payments based on workers’ earnings and number of working years.

September 2023 data shows that 87.1% of OASI beneficiaries receive an average monthly payment of $1,759.67, and 12.9% of DI beneficiaries receive average monthly payment of $1,350.00. In addition, there is Supplemental Security Income (SSI) for ages 18 to 65 and for those under 18 years of age. The average income in SSI varies between over $500 and close to $800 per month.

The Social Security Administration faces two problems for the funds. Assuming increasing life expectancy and the expected slowdown in population growth (www.cbo.gov), the workers to beneficiaries ratio is expected to fall; hence, tax contributions will fall. However, demands on trust funds will rise. The other problem is the cost of living adjustment of average monthly OASI benefits and supplemental payments, as measured by the Consumer Price Index (CPI). One reform proposal argues for the use of a wage-based index, rather than CPI, to save on benefit payments based on wage replacement rate.

Most wish to keep the trust funds funded to meet their commitments to aging populations of Americans. Many proposals have been made to reform the system, including increasing payroll taxes and reducing benefits. However, I discuss only two proposals that have been debated in the past. First, I would prefer to make the OASI tax progressive, just like income tax. Business contributions to the tax should also be made progressive based upon their income and profitability. The current tax is regressive since lower-income employees and lower-income and/or profitable businesses face a higher tax burden.

Secondly, the Social Security Administration could implement annuitized retirement plans in the private sector for future OASI recipients. Businesses offer defined-contribution 401(k) plans. However, varied OASI retirement plans in the private sector must be annuitized. The Social Security Administration could provide the choice to employees to join private sector-administered annuitized retirement plans, where a certain proportion of employees’ tax payments are invested in prescreened private funds of approved finance companies. Free financial advice provided by the private sector funds must also be part of OASI retirement plans.

A University of Michigan study on retirement and disability by Maria Prados and Arie Kapteyn in November 2019 finds that there “is sizable uncertainty about future retirement benefits among nonretirees.” They further state, “Our results on retirees corroborate that expectations about retirement are often biased, as retired individuals reported that on average they had been too optimistic about their retirement benefits.”

Thus, biased expectations result in lower savings for retirement, creating economic hardship for many retirees who primarily depend upon OASI benefits. The Social Security Administration’s choice-based retirement plans in the private sector, as stated above, could partly remedy economic hardship for many OASI beneficiaries.

Diamond contends, and I concur, that there is a need for radical reform to make the OASDI system financially sound and, at the same time, preserving and improving the benefit structure.

Vijay Mathur is former chair and professor in the Economics Department and now professor emeritus at Cleveland State University, Cleveland, Ohio. He resides in Ogden.

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