Alternative Contingency Policies for When the Social Security Trust Fund Is Exhausted

In a recent working paper , I discussed what could happen if the Social Security Trust Fund were exhausted in 2032, as currently projected, and Congress, gridlocked by politics, did not agree in time on a fix, temporary or permanent. According to the Trustees, total retirement and survivor benefits would then have to be cut by 24 percent (according to the Congressional Budget Office, 28 percent) to balance outgoing payments with incoming revenues, as required by law. These cuts do not necessarily have to be across the board, according to the analysis by Biggs and Shapiro (2024). They instead proposed a monthly benefit cap of $2,050 for all retired and survivor beneficiaries as sufficient to balance the system. In my working paper, I alternatively suggested that a means test based on individual net worth be employed, roughly modeled on the Australian general pension plan, because the cap would jarringly hit the oldest retirees while sparing those with lower benefits even if they had high net worth and ample retirement resources. Based on the parameters of the Australian test and data from the Health and Retirement Study (HRS), adjusted to recent US asset values, I found that restricting cuts to non-disabled beneficiaries ages 62 to 74 with individual net worths greater than $470,400 (partial cuts) and $785,400 (complete cuts) would be sufficient to balance the Social Security system in 2032. The net worth measure includes the market value of residences and all retirement assets, including the actuarial value of defined benefit pensions, and household net worth is split in half for couples. Some might argue that these net worth thresholds are too low, affecting even lower middle-class individuals living in areas with high real estate values. Others might find the age restriction unfair, contending that individuals with truly high net worths, regardless of age above 62 or any residual work capacity, should be able to weather the cuts, at least until Congress acts to reform the system. Here I investigate alternatives to that policy. First, I instead impose a simple means test on Social Security benefits for those with individual net worth of $2 million or higher in current dollars (roughly equivalent to $1.33 million in 2020 relevant to the HRS data). Under this test, no Social Security retirement or survivor benefits are paid if the individual net worth threshold of $2 million, thought to be sufficient for a comfortable retirement, is passed and the individual is above age 62. I then consider a slight adjustment to that cutoff, allowing a gradual reduction of benefits at a $78 per year for every $1000 in net worth above the threshold. Second, I impose the means test at the level of net worth below $2 million for all beneficiaries above age 62, set at whatever level would balance Social Security finances. According to my empirical analysis, a straight $2 million means test would achieve aggregate savings of 13.6 percent and affect 11.8 percent of the relevant population.  Imposed on today’s program, that would represent budget savings of roughly $185 billion out of the approximately $1.4 trillion annual benefit cost of Social Security retirement and survivor benefits. Among sub-populations, whites and never-marrieds would be more affected. If a gradual reduction were applied once the individual net worth threshold is met, as in the Australian pension plan and my original proposal, aggregate savings would fall to 11.8 percent, with 9 percent of the population subject to a full cut and 2.8 percent subject to a partial cut. Clearly, this newest alternative policy would not be sufficient on its own to meet the need at the time of Trust Fund exhaustion. It could serve, though, as the basis of a larger package to balance the program, either at the time of exhaustion or more permanently. Alternatively, the individual net worth straight test threshold could be set at $1.2 million. According to my empirical analysis, this would produce an aggregate savings of 27 percent and affect 23.7 percent of the beneficiary population. If a gradual reduction were instead desired, the threshold would need to be lowered to $1.125 million to produce aggregate savings of 24 percent, with 18.5 percent of the population subject to a full reduction and 6.7 percent subject to a partial reduction.  These net worth tests could work as part of a permanent Social Security reform if the negative moral hazard effect reducing savings and the capital accumulation needed for economic growth were softened. This could be done, for example, by instituting a mandatory retirement savings program for all workers, in addition to or partially in place of the defined benefit provision of Social Security. The post Alternative Contingency Policies for When the Social Security Trust Fund Is Exhausted appeared first on American Enterprise Institute - AEI .