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The longer we wait, the more difficult it will be for future of Social Security
Social Security policy is unsustainable in its current form. What has consumed a significant portion of Americas paychecks, and helped sustain a significant portion of Americas seniors is destined for change. - photo by John Hoffmire
Social Security policy is unsustainable in its current form. What has consumed a significant portion of Americas paychecks and helped sustain a significant portion of Americas seniors is destined for change.

In 2014, the trustees of the Social Security program released a report predicting that all of the trust funds reserves would run out by 2034. If nothing is done to save the program, benefits will have to decrease. However, assuming the program is saved, and benefits increase by the same formula, millennials could see benefits worth $2 million or more apiece.

How did Social Security grow from only one part of an act in 1935 to making up 24 percent of the federal budget in 2014? Social Security was originally intended to help the elderly who were poor, less able to work and more likely to have physically strenuous jobs. In the following decades, both parties expanded the program. Many of these expansions addressed real problems such as disability, inflation, spouses and survivors. Additional changes attempted to tackle future needs of the elderly by growing benefits through a formula.

Predicting the needs of the elderly was a thoughtful goal, but it means that a typical couple retiring today is estimated to receive roughly $1 million in benefits and cash from the program, according to a study by Eugene Steuerle. The study predicts that figure will increase to $2 million for many millennials.

With every retiree a future millionaire from a cash flow perspective, it is not surprising that Social Security has a murky future. Charles P. Blahous III, a member of the Board of Trustees of the Social Security Trust Funds, says that the current program is unsustainable: Benefits are not paid from savings but by taxing younger generations to support older ones. This might not have been a problem had the U.S. population kept growing at the baby boomer rate, but population growth has generally declined since. The other issue is that retirees are also living longer. This means that the ratio of contributing workers to beneficiaries has steadily decreased.

The formula used to calculate Social Security benefits, developed in the 1970s, uses wage indexing. The goal was for benefits to keep up with increases in prices. However, the formula was set to grow with the wage index, and wages grew faster than prices. The combination of these three factors has left benefits growing faster, in general, than necessary.

Logically, the only solutions are to increase tax revenue, reduce benefits, or some combination of the two. The most straight-forward approach to increase revenue would be to raise the payroll tax rate. Another alternative is to adjust the cap on earnings. Currently, taxpayers pay the Social Security tax on only the first $118,500 of earnings. While both approaches have merit, raising taxes is never appealing to taxpayers. Instead, they have seemed more willing to have benefits reduced.

Though there are many ways to reduce Social Security benefits, the most appealing options are raising the retirement age and changing the cost-of-living adjustment. The most common age of Social Security benefits claimed is currently 62. The younger part of the generation that fought in the Spanish-American War, the first retirees under Social Security, received their benefits at 65.

Since the elderly are now more able to work and have longer life expectancies, raising the retirement age is quite realistic. Another method to decrease benefits would be to tie their growth to price increases that influence the elderly rather than general inflation. Just last year, Rep. John Larson submitted a bill to Congress to link cost-of-living adjustments to the Consumer Price Index for elderly consumers.

While no one of these alone is likely to be the solution, solutions must be found. We may not have to find the answer today, or even this year, but the longer we wait, the more difficult it will be to solve the Social Security problem.

John Hoffmire is director of the Impact Bond Fund at Sad Business School at Oxford University and directs the Center on Business and Poverty at the Wisconsin School of Business at UW-Madison. He runs Progress Through Business, a nonprofit group promoting economic development. Josh Palkki, Hoffmires colleague at Progress Through Business, did the research for this article.