How to Pay for Social Security's Missing Trust Fund?

CRR WP No. 2017-18

27 Pages Posted: 23 Jan 2018 Last revised: 31 May 2019

See all articles by Alicia H. Munnell

Alicia H. Munnell

Boston College - Center for Retirement Research

Wenliang Hou

Boston College - Center for Retirement Research

Geoffrey Sanzenbacher

Boston College Economics Department

Date Written: December 1, 2017

Abstract

Social Security’s Trust Fund is projected to run out in 2034. As policymakers consider restoring financial balance to the program, one topic that may be discussed is how to structure any tax increases. Understanding why Social Security requires a higher payroll tax than a funded retirement program for a given level of benefits is a crucial first step in informing this discussion. The current “pay-as-you-go” approach is the result of the policy decision made decades ago to pay benefits far in excess of contributions for early cohorts of workers. By paying benefits in excess of contributions to early cohorts, the nation essentially gave away the Trust Fund that would have accumulated and, importantly, gave away the interest on those contributions. Thus, the payroll tax must cover not only the required contribution but also the missing interest. This paper addresses alternative ways to pay for this Missing Trust Fund, including a comparison of the size of the required changes and their distributional implications.

Suggested Citation

Munnell, Alicia and Hou, Wenliang and Sanzenbacher, Geoffrey, How to Pay for Social Security's Missing Trust Fund? (December 1, 2017). CRR WP No. 2017-18 . Available at SSRN: https://ssrn.com/abstract=3103318 or http://dx.doi.org/10.2139/ssrn.3103318

Alicia Munnell (Contact Author)

Boston College - Center for Retirement Research ( email )

Fulton Hall 550
Chestnut Hill, MA 02467
United States
617-552-1762 (Phone)

Wenliang Hou

Boston College - Center for Retirement Research ( email )

Boston, MA
United States

Geoffrey Sanzenbacher

Boston College Economics Department ( email )

United States

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