Economic Growth Not Enough to Fix Social Security, CRS Says

Social Security is facing a financial shortfall. And while economic growth will help the program, it alone will not be sufficient to address the challenges that face it, says a new report.

The Congressional Research Service (CRS) in “Social Security: Economic Growth and the Funding Shortfall” notes that under the current law and benefit structure, Social Security is estimated to be able to pay full scheduled benefits through 2035.

The CRS says that the Social Security program’s Board of Trustees demonstrated in their 2020 annual report to Congress that the projected funding shortfall is due in part to economic and demographic factors. Changes in age distribution, it notes, indicate that those employed are supporting an increasing number of people collecting benefits.

These demographic changes, the CRS says, also affect economic growth through the effects on labor force participation and employment. And, it adds, that all makes it unlikely that economic growth alone would restore solvency.

The report notes that the trustees’ intermediate assumptions suggest that low growth is contributing to the projected shortfall. And over the next 75 years, the CRS says, the trustees project program costs to exceed program revenues by 3.21% of taxable payroll.

Addressing the Shortfall

The report says that policy options that would help avoid such a shortfall generally fall into two categories:

1. those that increase revenues, such as raising the payroll tax; and
2. those that cut benefits, such as raising the normal retirement age.

The CRS notes that the program’s trustees estimate that a hypothetical payroll tax increase of 3.14 percentage points, a hypothetical benefit reduction of 19%, or some combination of the two, would need to immediately be enacted to avoid the shortfall.

The ability to pay full benefits would require the trust funds to redeem their asset reserves, says the CRS. And if those funds were depleted, it continues, the Social Security system would depend completely on continuing tax revenue in order to make benefits payments.

Economic Growth

The CRS notes that some also argue that economic growth could prevent the projected financial shortfall. Economic growth, they reason, would increase employment and real wages; this, in turn, through the payroll tax, would improve Social Security’s financial status— and could obviate any projected financial shortfall.

Generally speaking, says the report, increases in employment and real wages result in higher program revenues. In addition, other economic factors—such as the labor force participation rate and productivity—"have been shown to significantly impact the financial status of Social Security,” it says.

The report notes that the Social Security trustees in their 2020 annual report to Congress estimated how their intermediate assumptions for economic growth would affect Social Security’s projected financial status. And, says the CRS, they showed that Social Security’s financial status would improve if the underlying factors of economic growth were to increase, but that economic growth alone would be insufficient to resolve that shortfall.

“Although increases in real economic growth would benefit both workers and the program as a whole, these alone would not likely result in a permanent solution to the projected financial shortfall,” says the CRS.