Restoring Financial Balance to Social Security

As discussions commence on a legislative package to restore financial balance to the Social Security program, it is crucial to consider the implementation of an automatic adjustment mechanism.

While the financial projections of the package rely on the best current assumptions concerning wages, prices, and demographics, these assumptions might not remain valid over time. Consequently, the system could once again find itself at the brink of a deficit. Unfortunately, policymakers in the United States have a tendency to only address Social Security's financial problems when we are on the verge of catastrophe.

The last significant Social Security legislation was enacted four decades ago, in 1983. At that time, the program was on the verge of being unable to provide full benefits. Fast forward to today, and we are faced with the possibility of a 23% reduction in benefits by 2033, once the assets in the Old Age and Survivors Insurance (OASI) trust fund have been depleted.

Policymakers have been aware for many years that the OASI trust fund would be exhausted in the 2030s (see Figure 1), but they have failed to take any action. This inaction comes at a cost: It undermines Americans' confidence in our retirement system's foundation and leads some individuals to claim their benefits early, hoping to avoid future cuts for those already receiving benefits. Moreover, delaying action means that the necessary changes, when implemented, will need to be more sudden, leaving fewer generations to participate in the solution.

To avoid repeating such crises and instill confidence in the Social Security program's financial stability, any comprehensive solution package should include a mechanism that automatically adjusts revenues or benefits in response to emerging shortfalls.

Retirement Programs and Automatic Balancing Mechanisms

Challenges Faced by Social Security

A More Civilized Approach: Canada's Backstop Mechanism

Enhancing Confidence in Social Security's Long-Term Stability

Read: ‘Delay as much as you can’: Waiting to claim Social Security can provide the biggest payout