The answer to Social Security’s problem is right in front of us

The answer is increasing the labor participation rate and maintaining a sustainable worker to Social Security beneficiary ratio.

As of January 2024, the civilian noninstitutional population (population over age 16 not in the military or institutionalized) was 267.5 million.  Of this number, the number of workers was 167.3 million.  The labor participation rate was 62.5%

In 2023, Social Security receipts were $1,350.7 billion and expenditures were $1.392.1 billion for a deficit $41.4 billion.  The Social Security trust fund will be depleted by 2034 if no action is taken.

What are the conventional solutions? 

1.  Raise payroll taxes.  Somewhere along the line we have forgotten that when we raise taxes, we give up more of our freedoms — in this case to Washington D.C.  Also, the more we raise taxes, the more difficult it is for young couples to financially afford having children.
2. Means test Social Security.  When the employee and employer contributed 12.4% of the first $168,000 of 2024 income, there is an expectation that the beneficiary actually receives a benefit — the Social Security “contract” makes Social Security available to all participants who contributed into Social Security.  Breaking the “contract” won’t play well in Peoria.
3. Raise the earnings cap on Social Security.  Is it possible to tax the top 5% earners (income over $336,000/year) and save Social Security?  A single individual in California would pay just under 9% of their income in state income taxes, 30% in federal income taxes, and 6.2% (of course the employer will pay the other 6.2%) for a tax rate of nearly 45% — at what point does someone say it isn’t worth working any longer?
4. Raise the retirement age. Raising the retirement age would solve the financial of Social Security — it would also be demonized by politicians trying to persuade the independents they need to win elections and would cost political careers (not necessarily a bad thing).  The people we elect to be responsible aren’t capable of doing the responsible thing.

Here is the unconventional solution.  Raise the labor participation rate and officially lock in the worker-to-retiree ratio at a sustainable 2.8 workers per Social Security beneficiary.  In April 2001, the labor participation rate was 66.9%.  November 2006, the labor participation rate was 66.3%.  We are currently at a 62.5% labor participation rate. 

What would happen to Social Security in 2024 if labor participation was increased to 66%?  There would be 9.3 million more workers.  The number of employed civilians would increase from 167.3 million to 176.6 million.  Social Security receipts would increase 5.6% translating to Social Security having a surplus of $34.2 billion instead of the $39.4 actual deficit incurred in 2023.  Increasing the labor participation rate to 66% would have increased the worker-to-beneficiary ratio from 2.5 workers to 2.66 workers to beneficiary.  Get to 70% labor participation rate and we actually achieve a 2.79 worker to Social Security beneficiary ratio.  It should be noted that the highest labor participation rate since January 1948 occurred in April 2000 at 67.3%.

There are obviously many benefits to increasing the labor participation rate apart from putting Social Security (and Medicare) on solid financial footing.  Greater labor participation leads to more tax revenue and lower deficits for starters.

How do we achieve greater labor participation?

1. Enact polices that encourage work.  At the most basic level a work requirement for those on public assistance.
2. Enact policies that encourage manufacturing here in the USA. 
3. Common-sense regulation that doesn’t strangle innovation and encourages production here in the USA.  For example, ending the endless permitting process for mining our natural resources, building a nuclear power plant or a factory in the United States.
4. Appropriate tort reform that makes a business comfortable in building and innovating in the USA (as opposed to innovating in the USA and building outside of the USA).  A simple idea stolen from the rest of the world.  The loser pays the winners’ reasonable legal fees.
5. More capitalism and less government.

Can we get to 70% labor participation in the next four years?  Can families once again feel comfortable having 2.1 children per couple (1.78 as of 2022… replacement rate is 2.1)?

Image: SSA