Recent news reports indicate the Social Security Trust Fund will run out of money in 2035. What should be done? First some background. Social Security currently spends $1.145 trillion per year, making it the largest government expenditure program in the United States and probably the largest expenditure program in the world. Social Security supports about 65 million beneficiaries, including retirees, their survivors, and the disabled. Its beneficiaries account for 20% of the population of the United States.  Medicare, which covers health care expenses for the elderly spends $830 billion annually so it along with Social Security spends nearly $2 trillion per year. By comparison, United States defense spending is about $801 billion, and the U.S. spends more on defense than the next nine largest defense spending countries combined. 

Of course, Social Security is transfer program financed by a payroll tax assessed on the earnings of current workers. If Social Security collects more in tax revenue than it pays out in benefits the surplus goes into the Social Security Trust Fund. These surplus funds can only be invested in interest bearing U.S. Government bonds. From 1982 to 2020 the payroll taxes collected plus the interest earned from Trust Fund’s bond portfolio exceeded the benefits the system paid out, so the nominal dollar amount in the Trust Fund actually rose every year. However, in 2021 Social Security had to draw $56 billion from the Trust Fund to pay for the benefits it distributed.  

The Trustees of Social Security project this trend will continue. Unless something is changed it is also projected the Trust Fund will be depleted in 2035 when the system’s revenue will only cover about 80% of its promised benefits. So what to do? Obviously, some combination of benefit reduction and revenue enhancement must be implemented eventually, and in our opinion, the sooner the better.  

In the 1990s, Sweden reformed its old-age pension system. It made a number of tweaks but most notably made the system’s benefit obligations contingent on tax revenues collected. The Swedish system guarantees a basic fixed benefit to all recipients, but additional payments above that minimum depend on tax revenues. This ensures that those who rely on the system as their primary or sole source of retirement income are protected and secure in their income. It also ensures the system does not face a perpetual crisis of insolvency. A balanced budget—what a novel Nordic import!  A good model for the USA.