Romina Boccia and Dominik Lett
Can the United States outgrow Social Security’s financing problem or inflate away the resulting debt? The answer is a resounding no. The program’s rising costs are baked into its structure, with benefits automatically increasing alongside higher wages (coinciding with higher economic growth) and inflation. With fewer workers supporting more retirees, there’s no realistic path to balance without confronting the program’s flawed design. Delaying action will only make inevitable fixes more painful, including by forcing deeper benefit cuts and/or higher taxes.
In a new Cato policy analysis, we take a deeper look at how Social Security’s benefit and revenue design interacts with changing economic conditions, focusing on the stagflation episode of the 1970s and subsequent Social Security insolvency crisis as a case study to inform addressing the current budget shortfall. You can read it here.
Why Is Social Security Running Out of Money?
Longer lifespans, lower birthrates, and an overly generous benefit formula are driving Social Security’s insolvency. In 2023, Social Security ran a $133 billion deficit. That deficit will only grow in size over the coming years. By 2033, annual cash-flow deficits, including interest costs, will be $665 billion (see the graphic below). Without reforms, the exhaustion of Social Security’s borrowing authority—at trust fund exhaustion—will trigger automatic across-the-board benefit cuts of around 21 percent under current law.
A key driver of these deficits is Social Security’s demographic crisis. Since the program was created in 1935, life expectancy at birth has increased by nearly 16 years. Over the same period, Social Security’s full retirement age has increased by just 2 years, failing to reflect increases in longevity. Meanwhile, birth rates have declined. Because Social Security depends on today’s workers to fund current retirees, these twin demographic trends mean that fewer taxpayers are supporting more beneficiaries, straining the program’s finances.
To make matters worse, Social Security’s benefit formula ensures that benefit costs rise over time. To calculate a beneficiary’s benefits, the Social Security Administration (SSA) follows a complex formula, which involves indexing past wages to reflect the growth in wages to today. The SSA then adjusts those benefits to grow with annual inflation using an inaccurate inflation index. Inadvertently, this formula causes benefits to grow more generous over time in absolute terms (nominal increases) and relative terms (in excess of inflation). Without reforms, the resulting spending increases will continue to outpace revenues, deepening the program’s deficits.
The Issue With “Outgrowing” the Deficit
Hoping that economic growth will solve Social Security’s financial woes, as some politicians have suggested, is a pipe dream. Because Social Security benefits are indexed to wages, higher economic growth brings both higher revenues and higher benefits, leaving the long-term fiscal problem unresolved. In the best case, faster economic growth would only push back the trust fund insolvency date by a few years at most.
Take the 1990s, for example. During this decade, the US experienced a boom in productivity and capital investment thanks to technological innovations, favorable demographics, reduced global tensions, and globalization. However, these circumstances barely improved Social Security’s budgetary future, leaving insolvency looming on the horizon. Per the Committee for a Responsible Federal Budget, even if the US returned to the levels of capital growth, productivity growth, and labor force participation seen in the 1990s, it would fail to fix budget shortfalls driven by growing benefit costs and worsening demographics. In short, growth buys time but not solvency.
Lessons from the 1970s
If anything, history shows that depending on economic growth to stabilize Social Security’s finances is not just unrealistic—it’s dangerous. The last time the US faced a Social Security insolvency crisis, deteriorating economic conditions destabilized the program more rapidly than expected and resulted in last-minute, inadequate policy changes.
During the 1970s, stagflation—high inflation combined with stagnant wage growth—sent Social Security’s costs soaring while tax revenue lagged. In just six years, Social Security went from solid financial footing to projected insolvency by 1983. Predictably, policymakers waited until the last moment to rush through fixes to avoid major benefit cuts. But those changes didn’t fix the problems at the program’s core, which make it unsustainable.
Today, the Social Security program faces even larger budget shortfalls than those faced in the 1970s. Ominously, the 21st century’s demographic and benefit design problems come at a time of dwindling fiscal space, with the federal government racking up high debt with multi-trillion-dollar annual deficits. Per the Congressional Budget Office, the US will average $2.1 trillion in annual deficits over the next decade, resulting in a public debt of $52 trillion by 2035. This massive and growing debt burden could produce similar stagflation conditions as experienced during the 1970s, increasing inflationary pressures, reducing productivity, and slowing wage growth even without a sudden bond market panic.
Such conditions—whether triggered by an acute fiscal crisis or brought about by a slow decline—are a roadmap to faster Social Security insolvency, resulting in bigger deficits as benefits rise faster than inflation while tax revenue lags.
Let’s Avoid Repeating the Same Mistakes
Rather than waiting until the last moment to pass band-aid fixes, Congress should begin laying the groundwork for comprehensive Social Security reform now. A key principle of this reform effort should be to more closely align program revenues with benefits on an annual basis, not push back insolvency by a few decades on paper, as Congress did in 1983 while using Social Security’s surplus revenues to fund other government expansions. Promising options include:
Gradually raising the retirement age and permanently indexing the retirement age to account for increases in life expectancy;
Indexing initial benefits to prices rather than wages, protecting beneficiaries against inflation while reducing long-term cost growth;
Improving the accuracy of cost-of-living adjustments by using a more accurate inflation index (the C‑CPI‑U);
Reducing benefits for the highest-income retirees, entailing lower economic costs in comparison to an across-the-board payroll tax rate increase or lifting the payroll tax cap;
Shifting from an earnings-related benefit to a flat benefit, relying on a more predictable, transparent, and cost-effective method to prevent old-age poverty.
The only real fix to Social Security’s deficits will be to confront the program’s structural flaws, including by adjusting benefits and eligibility to reflect demographic and economic realities. That’s not an easy conversation, but kicking the can down the road will only exacerbate the program’s deficits and worsen the overall economic outlook, making inevitable, necessary policy reforms all that more painful.
Read the full policy analysis here.
