Want To Fix the U.S. National Debt? Let’s Start by Reforming Social Security

Key Takeaways

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 “Tackle the low‑hanging fruit first.” “Start with what’s in front of you.”
“Clean your room before you change the world.”

These popular colloquialisms capture the strategy of achieving small victories and building momentum so you can address larger problems. They might well be applied to the seemingly overwhelming challenge of curbing the unsustainable growth of U.S. indebtedness, which according to the most recent Congressional Budget Office projections will balloon by an additional $1.4 trillion over the next decade.

What’s the smaller problem in this scenario? The looming insolvency of the Social Security Trust Fund, whose reserves will be fully depleted by 2034. Absent program design changes, Social Security benefits will drop to a combined 81% of current levels – the level that can be supported only by ongoing payroll tax revenues. However, while Social Security might seem like an intractable problem, it can be fixed with reasonable – and achievable – policy changes.

My colleague and Baird’s Director of Advanced Planning Timothy Steffen covered the two most widely discussed solutions to address the looming depletion of Social Security – raising payroll taxes and cutting benefit payments to current and future beneficiaries – in his “Planning for the Future of Social Security” video last fall. Below are some additional strategies that might be worth exploring.

Options To Increase Program Revenues

• Raise or eliminate the taxable maximum (“wage cap”). Social Security's Old-Age, Survivors and Disability Insurance (OASDI) program caps the amount of earnings subject to taxation in a given year – in 2026, this “cap” is set at $184,500. Lifting that cap so all earnings are taxed could extend the life of Social Security by an additional 25 years, though it would inevitably face resistance from high‑income earners and businesses.
• Increase the taxation of benefits. If you’re taking Social Security and your income is greater than $34,000 ($44,000 for those filing jointly), up to 85% of your Social Security benefits are subject to income tax. That tax could be raised to 100% of Social Security benefits for high-income beneficiaries, such as individual filers with an adjusted gross income above $100,000. This solution would also raise significant revenue without increasing taxes for most workers, though again high‑income earners and businesses would likely oppose it.

Options To Reduce or Slow the Growth of Benefits

• Modify cost‑of‑living adjustments. Cost-of-living adjustments to Social Security benefits are based on what’s known as the CPI-W, the Consumer Price Index for Urban Wage Earners and Clerical Workers, which measures inflation using a mostly fixed basket of goods. Using what’s called a “chained CPI” adjusts for real behavior by accounting for substitutions people make, like buying chicken instead of beef when beef gets more expensive. Proponents argue that making using a chained CPI to determine Social Security cost-of-living adjustments would more accurately reflect consumer behavior and provide meaningful savings that compound over time. However, it would also cut benefits for all retirees, and its broad impact would be politically unpopular.
• Increase the retirement age. Gradually raising the normal retirement age (for example, two months per year until reaching age 70) could provide meaningful savings that compound over time. However, it could disproportionately hurt lower-income and especially manual workers whose ability to maintain a livelihood could be compromised with advanced age.

Options To Restructure Program Financing

• Invest Social Security Trust Fund assets in marketable securities. By law, the Social Security trust fund assets can only be invested in “special issues” of the United States Treasury, which are securities guaranteed as to both principal and interest by the Federal government. Allowing a portion of the trust fund to invest in private‑sector securities could lead to potentially higher returns, though these returns would be subject to market conditions.

The Social Security Administration has provided a comprehensive list of proposals that could make a big difference in restoring the trust fund’s solvency.

Clean Your Room Before You Change the World

Putting Social Security on solid financial footing would have a significant near-term impact on real people in the real world. Currently 75 million Americans rely on Social Security or Supplemental Security Income benefits. Letting those benefits expire or step down without a carefully considered replacement in place could be financially devastating for many. The intent of this post isn’t to promote one solution over another – on the contrary, problems of this size typically require multiple approaches working from different angles. But these solutions are possible if we have the willingness to act.

Moreover, fixing the Social Security shortfall could serve as a reminder of what is possible with collective and responsible action. It may be a pipe dream and wishful thinking, but if we as a nation – from the President to Congress to voters – can fix Social Security, maybe it will breathe some confidence into the notion that sacrifices for the greater good can once again be on the table and give us the societal backbone to tackle our national debt.

The information reflected on this page represents Baird experts’ opinions as of today and is subject to change.

The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action. The views and opinions expressed here are those of the speaker and do not necessarily reflect the views or positions of the firm.