According to the 2026 Social Security Trustees Report, the Social Security Trust Fund is projected to hit zero by the end of 2032. Under current law, that means a 22 percent benefit cut for all existing and future beneficiaries.
It sounds horrific. Yet this outcome might be the most realistic option available.
Social Security collects taxes from the working-age population and pays benefits to the “retired” population. The taxes flow into, and the benefits out of, a trust fund. Thus, the system’s financial condition depends, under existing law, on the status of this trust fund.
Congress has three ways to restore Trust Fund solvency: increase Social Security taxes, cut Social Security benefits, or transfer non–Social Security revenues. Any of these would require amending current law. Congress presumably has no appetite for such policies, as they would be wildly unpopular across the political spectrum.
The fundamental problem is that under the trustees’ intermediate projections, scheduled benefits substantially exceed projected dedicated revenues over the 75-year valuation period.
Someone must bear the pain of the existing imbalance. The choice of who and how involves both efficiency and distributional considerations.
Raising Social Security or non–Social Security taxes will have the standard disincentive effects on savings and labor supply, with magnitude and details depending on which economic activity is taxed. At low levels of taxation, these inefficiencies might be modest, but as the overall tax burden is already substantial, additional taxes will likely hinder economic growth.
The distributional implications of higher taxes depend as well on the structure of any new taxes. Most likely, given the political climate, the focus will be high earners. This makes adverse incentive effects more likely because a progressive approach will raise the highest marginal tax rates. And the definition of “high earner” will likely expand over time, pulling in much of the middle class.
Cutting benefits, in contrast, has efficiency benefits: stronger incentives for private saving and labor supply, including delayed retirement. Many will advocate for benefit cuts that especially hit high earners but that diminish the efficiency benefits: A progressive benefit cut is equivalent to a proportional benefit cut combined with a progressive tax hike.
Thus, based on incentive effects alone, the ideal Social Security system would have much lower benefits, if any. The distributional goal of Social Security—providing income to elderly people no longer able to support themselves—would fall to the Disability Insurance system (or even better, be left entirely to individual states). This was one of Social Security’s original goals: protecting people against outliving their earnings, rather than providing a retirement cushion for those able to continue working.
To be sure, the specific benefit cut that will occur if Congress does nothing is probably not the ideal. A better approach might exempt those already receiving benefits and phase in the cuts over time. The ideal cut would also increase the age of eligibility (again, over time).
Thus, in a perfect world, Congress would enact a substantial but compassionate cut in benefits. Yet this seems unlikely. The good news is that doing nothing—letting the 22 percent reduction in scheduled Old-Age and Survivors Insurance benefits happen—is roughly in the right direction.
Cross-posted from Substack.
