What is the future of Social Security?

As Social Security continues to march toward insolvency, Olivia S. Mitchell of the Wharton School discusses current policy debates and the role of financial literacy in achieving reform.

Estimates on the time of death for Social Security’s solvency vary, but one consensus endures: It will go insolvent if nothing is done. And likely, according to the Congressional Research Service and the Congressional Budget Office (CBO), within the next 10-12 years.

Several proposals have been floated through the halls of Congress in recent years, but the most prominent of them is the Social Security 2100 Act. Kent Smetters, a professor of business economics and public policy, and faculty director of the Penn Wharton Budget Model (PWBM), led an analysis of that bill in September 2019. The PWBM is a nonpartisan initiative that analyzes public policy and its fiscal impact; the Social Security 2100 Act is a bill introduced in 2019 by U.S. Rep. John Larson (D-CT) that raises tax revenue to expand benefits.

Though the bill has been overhauled since the PWBM’s analysis in September 2019—tweaked significantly in 2022—and its viability in the new Congress remains an open question, Smetters says the anchor principles of the original bill’s approach to reform will likely remain in future proposals. Namely, reforms generally aim to not cut benefits; benefit cuts are what would need to be done under current law to keep Social Security solvent.

Olivia Mitchell. — Wharton’s Olivia S. Mitchell. (Image: The Wharton School)

Among the key findings of the PWBM’s analysis was that the Social Security 2100 Act, in its 2019 form, would keep Social Security balanced through 2093. It reallocates the debt burden through payroll tax adjustments and alters how benefit increases are made per year, while also increasing GDP by 2% by 2050—though Smetters notes that most plans for reform add to GDP long-term. It would also unite Old Age and Survivors Insurance and Disability Insurance, which make up what is known as Social Security but operate independently. And though the Social Security 2100 Act is but one proposal, it signifies the ongoing debate around how to handle the realities of a problem that won’t resolve itself, regardless of the stymying nature of partisan politics.

Olivia S. Mitchell, a professor of business economics and public policy at Wharton, as well as a professor of insurance and risk management, discusses the urgency of Social Security reform, the barriers to progress—most notably, financial literacy—and the state of the Social Security 2100 Act. One of Mitchell’s professional focuses is on public and private pensions; she previously served on the President’s Commission To Strengthen Social Security.

How would you characterize the urgency of dealing with reform of (or adjustments to) Social Security?

The Social Security program is the single largest program run by the U.S. federal government, making up 21% of the annual U.S. federal budget. Medicare, Medicaid, and other health care programs comprise another 28%. Benefits are mainly financed from the Social Security payroll tax to the tune of about $5,300 per year per worker, and average benefits amount to about $18,000 per year, per beneficiary. The program’s budget has run short since 2010, when program costs began to exceed payroll tax revenue; this gap continues to grow at a rapid rate.

The CBO recently announced that the system will become insolvent in 10 years. As a result, benefits for all current and future retirees must be cut by about one-quarter, unless a new source of tax financing is found. For this reason, I believe that this is an extremely urgent problem, as workers, disabled persons, retirees, and our children simply cannot plan ahead without knowing what will happen to Social Security in the future.

To illustrate how poorly funded Social Security is, we would need an additional $20.4 trillion to keep the program stable just over the next 75 years, and $61.8 trillion to keep it going for our children and grandchildren. This enormous black cloud will haunt future generations and hobble economic growth for the foreseeable future.

Social Security reform feels like one of those evergreen policy debates that comes and goes but nothing is ever accomplished—much like infrastructure, until recently. Why is this? A majority of people, according to Pew surveys, still favor securing the program.

Very few Americans understand how the Social System actually works, which helps explain why so few understand the potential impact of reforms and alternative policies. One way to learn what can be done is to consult well-designed calculators and websites, which can help. Another deep-seated need is to boost Americans’ levels of financial literacy using apps and training courses in high school, college, and the workplace.

Do you have an example of what such courses might be, and how they can help?

The Wharton School has launched a program called Knowledge@Wharton High School, which is a free web publication intended for high school students and their teachers. That site has a great deal of information on syllabi and programs that can help people enhance their financial literacy.

Your 2011 book on financial literacy touched on low levels of financial literacy, and the relationship between people being more responsible than ever for their savings, yet not knowing what to do with that responsibility. What has been the effect of people being more in charge of their own retirement savings?

My research shows conclusively that young people exposed to financial literacy do a better job as adults planning for retirement, saving, accumulating wealth, and understanding longevity risk.

The book also poses a sort of ‘chicken and egg’ question, exploring whether wealth drives financial literacy or literacy drives wealth. The finding seems to be that financial literacy can drive wealth. Why and what can we do with that knowledge to change policy?

The evidence is convincing that financial literacy drives wealth, and not the other way around. In particular, we find that around 30-40% of wealth inequality is driven by financial literacy.

What are some notable changes in financial literacy since the book was published in 2011? Has there been any improvement?

A very useful tool in this area has been the P-Fin Index, an annual survey conducted over each of the last five years. The most recent survey found little to no improvement in Americans’ financial literacy, with Black people, Hispanic Americans, and the young answering the fewest financial questions correctly. Clearly, the playing field is not becoming more level over time, which should provide educators and policymakers reason to do more to target financial literacy programs at the most vulnerable.

The Social Security 2100 Act: It seems to be the one bill among the bunch that is considered viable. Why do you think this is? What do you think are some pros and cons of the bill as it currently stands?

There have been several versions of the Social Security 2100 Act. The most recent version, proposed in 2022, has been roundly criticized for taking a narrow perspective–only five years–after which key provisions would sunset. Social Security’s chief actuary has reported that this bill, if passed, would defer insolvency by only four years. Evidently those advocating the most recent bill do not have solvency as a clear goal, which is a shame.

A fundamental debate that seems to be happening is whether to improve and expand benefits, or just focus on making it solvent. How would you prioritize, or balance, those two?

When I served on the bipartisan 2001 Commission to Strengthen Social Security (CSSS), we proposed to return the system to solvency without benefit cuts—and indeed, there was sufficient funding left over under our plan to boost benefits for the very lowest-income retirees. Very simply, our plan was to grow benefits at the rate of price inflation instead of the current approach, which is all it took to restore the system to balance. In addition, we designed a private account option, although this was not mandatory and was completely cost-neutral. I still maintain that this proposal is a very good option for our country.

Is there any hope for Social Security reform in the new Congress? Why or why not?

With the exception of a handful of important bills that Congress agreed on in 2022, such as the Secure 2.0 bill, there continues to be little in common for the players to agree on across a wide range of topics. I deeply regret this deepening polarization, which bodes ill for the prospect of Social Security reform.

A lot of the reform pushes seem to be coming from Democrats. What are the Republican priorities with Social Security that you hear?

Something I don’t hear enough about from either side is the critical need to raise retirement ages in America. With Americans’ average ages rising, combined with a long-term decline in physically demanding jobs, it’s imperative for more of us to work longer and delay claiming benefits if we are to prosper as individuals and a nation.

Is there a financial consensus on what the age would need to be raised to?

Raising the retirement age is important, yet it is only part of the reform package that would be needed to restore the solvency of the U.S. Social Security system. The Social Security Advisory Board noted that raising the full retirement age to 72 gradually would eliminate only about 29% of the shortfall. Clearly more is required, including reducing the growth rate of benefits and increasing system revenue. I recommend the website of The Committee for a Responsible Federal Budget, which has an interesting interactive tool that allows you to ‘try out’ your favorite reforms. My proposal would be to do a bit of everything, so that the burden is spread more evenly across generations.