By Mark Miller

(Reuters) – The U.S. government recently released its annual report on the health of Social Security. This was met with alarming predictions from media and pundits.

Soon, Social Security will be bankrupt! We are seeing insolvency years sooner than we expected! There is a possibility of benefits being cut. 

This is what happens every year as the Social Security trustees issue their annual report about the financial health and condition of the program. A new twist was added by the pandemic-induced depression of 2020. Many forecasters had predicted that COVID-19 would significantly worsen Social Security’s financial prospects before the report was published.

Guess (NYSE:) what: it didn’t happen. The U.S. Congress must address the long-term imbalance in Social Security finances. While they’re at it, lawmakers need to increase benefits in a specific way.

The dramatic drop in earnings and employment in the second quarter 2020 resulted in lower Federal Insurance Contributions Act revenue (FICA), which was paid into the system temporarily by both workers and employers. Although the Pandemic caused some financial problems for Social Security, it was only a slight problem. According to the trustees, 2034 will see the total retirement and disability trust assets of Social Security depleted. This is one year earlier that was predicted last year.

“We were all expecting substantially lower earnings and employment throughout the year,” said Stephen C. Goss, chief actuary of the Social Security Administration, during a webinar discussion of the trustee report convened last week by the National Academy of Social Insurance. “In fact, the earnings and employment came back more rapidly than we and others had anticipated.”

The causes of the long-range imbalance in Social Security have long been clear: rising benefit outlays expenses as the nation ages, and a dramatic decline in birth rates, which translates into fewer workers paying into the system over time.

These problems have been known to Congress since the beginning of 1990s. The situation is still a deadlock, due to insufficient consensus regarding how to fix the problem. This has been especially true with rising political polarization. Conservatives advocate a longer full-retirement period, which in effect cuts your benefits and raises the threshold for full benefit. Progressives on the other hand have reached a consensus about new revenue and expanding the tax base over the last decade.

There is no doubt that 2034 will see the end of trust funds. This cannot be ignored. A draconian and broad-based benefit cut of around 20% would then be implemented on all retirees, current or future, without Congress taking action. However, there are options.

“Congress will need to make choices,” said Goss. “We can either increase our revenue by about one-third, or reduce the scheduled benefits by that much, or do some combination of the two. But enacting the changes sooner than later allows more possibilities for the Congress to consider a more gradual phasing-in of changes, and more advanced notice to everyone who will be affected.” 

KICK THE CAN OR TAKE ACTION

A higher full-retirement age, phased in over time, would be the most likely benefit cut. Argument: We are all getting older so Social Security benefits should not be delayed. However, not all people are living longer. The recent increases in longevity have not been evenly distributed. People of color and those with lower incomes have seen their longevity shrink or stagnate, which makes the retirement age differential extremely inequitable. 

The lawmakers may just push the issue further, until 2034 is closer – but if so, there are high odds that no benefits cuts will occur. Although it is unlikely Congress will impose benefits cuts retroactively on current beneficiaries at this point, that could mean that substantial cuts would only be made to future beneficiaries. In that scenario, it would be difficult to avoid insolvency by relying on benefit cuts. Tax increases and general government revenue are the only options for new revenue.

It is possible to prevent trust-fund exhaustion by taking action earlier. But Congress must also consider targeted benefit expansion in order to combat rising income inequality, racism, and gender disparities that threaten retirement security. It should be possible to increase the preretirement income Social Security replaces, particularly for those with lower and middle incomes who rely the most on it. 

Over the last decade, many expansions have been suggested. These include benefit credits to people who are unable to work in order to care for children and disabled adults. There is also a greater cost-of living adjustment for those with higher incomes as well as increased benefits for widows. Also, we need to reduce the amount of benefits that are available for claimants who reach full retirement age. These cuts have been inequitable from a actuarial perspective since they were first enacted in the 1950s.

These changes can be paid for with small increases in FICA rates or other methods. One example is to allow the trust funds invest some of their assets in equities or tax financial market transactions.

It would be more productive to reform the program earlier than expected. This would enable us to have a deeper discussion and debate about potential solutions. And perhaps – just perhaps – action would extinguish the demagoguery that has fueled so much worry among the public about Social Security’s future.