Social Security Has an Overspending Problem, Not an Undertaxing Problem

Social Security's financial outlook continues to worsen, yet many policymakers continue to promote higher payroll taxes as the primary solution. New analysis suggests that approach would impose significant costs on workers while doing little to address the program's underlying problem.

A recent Cato Institute analysis found that Social Security's Old-Age and Survivors Insurance Trust Fund is now projected to become insolvent in 2032, one year earlier than previously expected. If Congress fails to act, beneficiaries would face an automatic benefit reduction of roughly 22 percent. The report also estimates that Social Security's long-term unfunded obligations have grown to approximately $30 trillion.

Those figures reflect a serious fiscal challenge, but they do not point to a lack of tax revenue. Payroll tax collections are expected to remain a relatively stable share of taxable payroll over time. The challenge is that Social Security's spending commitments continue to grow faster than the revenue collected to finance them.

Benefit Growth Is Driving the Shortfall

As more Americans retire and beneficiaries live longer, Social Security's expenditures continue to outpace the growth of its dedicated tax base. Benefits are projected to grow faster than inflation and faster than the growth of the economy supporting the program. The result is a widening gap between promised benefits and available resources.

Many discussions of Social Security focus almost exclusively on raising taxes. The program's financial outlook suggests Congress must also address the growth of future benefit obligations. A larger payroll tax would generate additional revenue, but it would not change the demographic pressures driving the program's long-term imbalance.

The size of the financing gap reflects a program whose future spending obligations are growing faster than its dedicated revenue stream can support. Addressing only the revenue side leaves the underlying challenge unresolved.

Workers Would Pay More for an Incomplete Fix

According to Cato, eliminating the program's financing gap solely through payroll taxes would require increasing the combined Social Security payroll tax rate from 12.4 percent to 16.65 percent. For a median-income worker, that would amount to roughly $2,900 in additional annual payroll taxes.

Such an increase would reduce take-home pay for workers across the economy while leaving the program's long-term spending trajectory largely intact. The financial imbalance stems from benefit commitments growing faster than the revenue base supporting them.

Public opinion also presents a challenge for tax-focused reform proposals. A recent Cato Institute and YouGov survey found that 77 percent of Americans oppose increasing their own taxes by $1,300 annually to support Social Security. The tax increase required to fully close the financing gap would be substantially larger.

The survey results align with broader concerns about affordability. Americans continue to face higher costs for housing, food, healthcare, insurance, and other household expenses. Proposals that reduce take-home pay are likely to encounter significant resistance from workers already facing budget pressures.

Reform Should Focus on Higher-Income Beneficiaries

Social Security reform should begin with the spending side of the program.

CFE has previously argued that Social Security should be more closely targeted toward its original anti-poverty mission. Lower-income seniors who depend heavily on Social Security should be protected. Benefits for higher-income retirees should be adjusted to reflect their greater ability to finance retirement through personal savings and other resources.

A program facing trillions of dollars in unfunded obligations cannot rely exclusively on higher taxes. Bringing future benefit growth closer to the program's financing capacity would strengthen Social Security's finances while preserving benefits for retirees who rely on them most.

CFE has previously proposed reforms that would begin with higher-income beneficiaries rather than younger workers. Social Security was created to provide retirement security and prevent poverty among seniors. It was not designed to provide ever-larger benefits to retirees with substantial incomes and assets.

Targeted reforms that slow benefit growth for higher-income retirees would improve the program's finances while preserving benefits for lower-income seniors. Such changes would place the burden of reform on those best positioned to absorb it rather than on workers already struggling with affordability challenges.

CFE Takeaway

Social Security's financial challenges are driven primarily by spending growth, not a shortage of payroll tax revenue. Raising payroll taxes would take more money from workers while addressing only part of a much larger structural problem. Congress should focus on reforms that slow the growth of benefits for higher-income retirees, protect vulnerable seniors, and place the program on a sustainable long-term footing.