Most things described as a fiscal cliff are a negotiating position. This one is a sentence in the law. Joseph Sternberg’s Political Economics column in Friday’s Journal makes the point that gets lost in the argument about how to fix Social Security: if nothing is fixed, something specific happens on a specific date.
By 2032, on current projections, the trust fund for the old-age portion of Social Security is exhausted. At that point the law does not authorize borrowing to cover the gap. Annual benefit payouts immediately shrink to match annual payroll-tax revenue. In the first year, that is a 22% reduction in checks.
No vote is required to produce that outcome. A vote is required to prevent it.
The fix everyone reaches for first
The program is funded by a payroll tax of 12.4%, borne equally by employer and employee, applied to the first $184,500 of taxable income. The obvious-sounding repair is to lift that cap so higher earners pay on all of it — removing a regressive feature and creating a large new revenue stream in one move.
Liberals have pushed for this for years, and Sternberg’s alarm is that Republicans are starting to join them: Sen. Bernie Moreno of Ohio co-wrote an op-ed for the change with Sen. Elizabeth Warren this summer, and Rep. Tom Cole, the Appropriations Committee chairman, recently said something similar.
Sternberg’s objection is arithmetic before it is ideological. Over the next 75 years the combined old-age and disability systems expect a $29 trillion shortfall between the cost of extending today’s benefits and the revenue today’s payroll-tax rules will raise. The Social Security Administration believes eliminating the cap would close at best 67% of that gap. Other estimates, including Cato’s, plausibly put it nearer 50% — and perhaps as little as 30%.
So it is not a one-and-done fix. It is a large tax increase that still leaves a conversation about eligibility and benefit levels to have afterwards — which is the heart of his argument that giving it away early is a strategic error. He also notes the Tax Foundation’s estimate that eliminating the cap would constitute the largest tax increase as a share of GDP since 1982, and the second-largest peacetime increase since at least 1940.
Our read — and this is the important part
This desk has no position on which party should win this argument, and a strong position on what a household should do while it runs.
The temptation is to treat 2032 as an abstraction and wait for Washington. That is understandable and it is the expensive choice, because the decision that actually matters — when to claim — has to be made by individuals years before any legislation passes, and it is largely irreversible.
Three things are worth doing in the next fifteen minutes, none of which requires predicting the outcome.
Get the number. Pull the actual benefit estimate from the Social Security statement, at 62, at full retirement age and at 70. Most people are working from a figure they half-remember or a number a friend quoted. The real one is free and takes four minutes to retrieve.
Then run the plan twice. Once with the benefit as promised, once with it reduced 22%. The gap between those two answers is the honest size of the exposure, and it varies enormously between households: for someone with a pension and substantial savings it may be a nuisance, and for someone whose retirement income is mostly Social Security it is the whole plan. Knowing which of those you are is worth more than any forecast about Congress.
Understand what delaying actually buys. Waiting past full retirement age increases the benefit by roughly 8% a year to age 70, and that increase is inflation-indexed for life. That remains one of the very few risk-free real returns available to an individual. Note the nuance carefully, though: a proportional across-the-board cut would apply to a larger delayed benefit as well, so delay does not immunize anyone against the cliff. It changes the size of the base, not the percentage.
There is a date on the wall six years out and a percentage attached to it. That is unusually clear weather to plan for. Pull the statement, and we will run it both ways.