Delaying Social Security Reform Risks Fiscal Instability

While discussions about reforming Social Security are nothing new, inaction poses grave risks of fiscal instability, according to a recent paper published by the Mercatus Center at George Mason University.

Social Security’s long-term financing shortfall—estimated to be approximately $2.8 trillion from 2032 through 2036—coupled with already rising deficits and debt may become a critical fiscal inflection point in the early 2030s, the paper, “Social Security’s Fiscal Gap and the Risk of Bond Market Strain” stated. By 2033, the U.S. debt is expected to be $46.5 trillion, or 118% of projected GDP. Social Security’s Old-Age and Survivors Trust Fund, which pays retirement and survivor benefits, is projected to be depleted in the fourth quarter of 2032, according to the latest Social Security Trustees Report.

The paper was co-authored by Veronique de Rugy, a senior research fellow at Mercatus, and Jason Fichtner, executive director of the LIMRA Retirement Income Institute and a former Mercatus senior research fellow. The Mercatus Center promotes “market-oriented thinking” and “classical liberal ideas,” according to its website, and has received “long-standing support” from the Charles Koch Foundation.

‘The Stress Has Already Begun’

“The case for acting now on Social Security reform does not rest on a forecast of future stress,” the paper stated. “Rather, it rests on the observation that the stress has already begun.”

According to the Mercatus Center paper, delaying reform could lead to higher interest rates and borrowing costs or to inflationary adjustments that “erode the real value of government liabilities.”

Because Social Security does not have its own borrowing authority, depletion of the OASI Trust Fund would automatically reduce benefits to the level supported by current revenue. Without legislative action, benefits will be reduced by approximately 22% when the OASI Trust Fund is depleted, according to the Social Security Trustees’ report.

The paper stated that to avoid an automatic reduction in benefits, policymakers would have to choose among benefit adjustments, revenue increases or transfers from general revenues—and long-term effects of those choices would include increased federal borrowing, increasing strains on Treasury markets and the broader economy.

Micro Concerns

Gal Wettstein, an associate director of health and insurance at the Center for Retirement Research at Boston College who is not affiliated with the paper, says that while Mercatus’ paper expresses “macro concerns” about delayed reforms, there are “micro concerns” for Congress to consider as well.

“Many people believe Social Security won’t be here for them at all,” Wettstein says. “It’s a sort of uncertainty that people hedge their bets against.”

An individual who claims Social Security sooner than they otherwise would have—due to the expectation that funds will run dry—would lock in a lower level of monthly benefits. Wettstein says that can lead to savers investing their assets more conservatively and delaying their retirement age, among other costly choices.

“The longer [Congress] puts off [reforms], the longer people are paying what is effectively an insurance premium,” Wettstein says. “If they are investing in safer assets … they’re forgoing returns.”