2032 Is Just Beginning of Social Security’s Problem

Unfortunately, the System’s cash flows will continue to worsen over time, requiring even larger cuts in future years. Indeed, benefits need to be permanently reduced by 31 percent starting today to avoid cuts, starting at a future date, that are permanently larger than 31 percent. Alternatively, taxes need to be increased by 46 percent via an immediate and permanent 5.7 percentage-point hike in Social Security’s FICA tax rate from its current 12.4 percent rate to 18.1 percent.

This is the truly horrific news in the just-released Social Security’s Annual Trustees Report — news the Trustees buried deep in the Report’s appendix to keep us from seeing the true extent of the System’s bankruptcy.

The Report runs 273 pages, but you won’t learn about its true financial condition until page 231, which displays table VI.F1. The Report should just include page 231. Then everyone would see the full problem the System faces.

Social Security’s Unfunded Liability is 2x GDP

According to table VI.F1, Social Security has a colossal $71.9 trillion present value unfunded liability! I.e., it needs $71.9 trillion, not in a century, not in a decade, not in a year, not in a month, and not in a week. It needs $71.9 trillion today — not to be spent today, but to be safely invested so there is enough principal plus interest, over time, to never have to raise taxes or cut promised benefits.

Social Security’s off-the-books $71.9 trillion IOU, which economists call its fiscal gap, is more than two times GDP. And since official debt in the hands of the public is close to 100 percent of GDP, Social Security’s unofficial debt is also more than twice our nation’s official debt.

Table VI.F1 calls the System’s $71.9 trillion funding shortfall the “Unfunded Obligation Over the Infinite Horizon.” It’s measured as a) the present values of all projected future benefits and operating costs less b) the sum of all projected future FICA payroll taxes, less c) the assets sitting in Social Security’s checking account, which are oxymoronically called its trust fund.

Putting Lipstick on a Pig

Table VI.F1 also reports a $29.3 trillion unfunded liability, which the “Trustees” exclusively reference. How do you make $42.6 trillion — the difference between $71.9 trillion and $29.3 trillion — of red ink disappear? Easy. You assume that $42.6 trillion of net benefits (benefits net of taxes) that will be owed to our current and future children simply won’t be paid.

This is no different from rating a bankrupt company by valuing its sales and ignoring much/most of its liabilities. In 2002, Arthur Andersen, a Big-5, global accounting firm with 85,000 employees was shut down overnight by the Justice Department for engaging in precisely this form of “accounting.” The Chair, CEO, and CFO of Andersen’s client, Enron Corporation, landed in jail for orchestrating the fraud and effectively bribing Arthur Andersen to look the other way.

In their overview, the Trustees make no mention whatsoever of the System’s fiscal gap. Instead, they focus on its 75-year unfunded liability with this justification.

The Trustees make actuarial estimates for a 75-year period (2026 through 2100 for this year’s report) because it is a period long enough to cover the remaining lifetime for virtually all current Social Security participants.

Doing Too Little Too Late

This is the first Trustees Report since Social Security’s fiscal gap was calculated, starting in 2003, to exclude any reference to the System’s real financial shortfall. This said, all of the other Reports focus primarily on the 75-year unfunded liability. This time frame was adopted 20 years earlier by the Greenspan Commission in solving the System’s then 2.0 percentage point, not 5.7 percentage points of taxable payroll fiscal gap. By ignoring the System’s true, long-term financial shortfall, the Commission, chock full of politicians, did as expected, far too little. As a result, we’re facing today a Social Security funding problem that’s almost 3x larger than it was in 1983.

Consider the analogy of a surgeon who decides to excise half of his patient, Joe’s malignant tumor.

“Joe. Let’s take out half now and have you come back in a year. Sound like a plan?”

Joe agrees without knowing what’s really at stake. A year later he returns and his tumor is twice its original size.

Again he hears:

“Joe. Let’s take out half now and have you come back in a year. Sound like a plan?”

Yet another year passes and Joe fails to make his appointment. The reason? He’s dead.

Something that Can’t Go On Will End Badly

Herb Stein, President Nixon’s Chair of the Council of Economic Advisers, had a favorite saying, “Something that can’t go on will end.” In recognizing, let alone addressing, only 40 percent of the System’s fiscal gap, we’re guaranteeing that something that can’t go on will end extremely badly — no different, really, than continually paying only 10 percent of our credit card bills when the interest rate is 20 percent.

What Will Happen?

Our country is on a slow but steady train ride to Argentina. Argentina’s per capita GDP was 85 percent of ours a century back. Today it’s 14 percent. Countries that run ruinous fiscal policies end in economic ruin. The United States is not the exception to the rule. Our nation’s overall fiscal gap is massive when measured in terms of the cross-the-board tax hike or spending cut needed to cover all our liabilities — off-the-books as well as on-the-books. Indeed, the US is now in materially worse fiscal shape than Italy. Yes, Italy has more official debt, but far less unofficial debt relative to its GDP. Here’s a study that was conducted jointly with a top economist at the Bank of Italy that compares the two countries’ long-term fiscal conditions.

Yes, Herb. What can’t go on will stop. The politicians will address 2032, but their most likely moves entail doing yet again, too little too late. At best, they will try to fix the 75-year shortfall and ignore 60 percent of Social Security’s fiscal sustainability problem.

My guess is they will gradually raise the full retirement age from 67 to 70 and raise the ceiling on Social Security-taxable earnings so that the same share of total labor earnings is subject to Social Security’s FICA tax. These reforms will close perhaps 20 percent of the System’s fiscal gap but roughly half of the 75-year liability. The rest of the 75-year liability will likely be covered by an increase in corporate income taxes or, perhaps, the introduction of a business cash-flow tax whose structure would replicate that of a value added tax. Again, such a “fix” will leave us with a very large and growing financial tumor.

What Should Happen?

The right solution to Social Security is to freeze the current System, pay off, over time, all accrued benefit promises, use a reduced Social Security’s FICA tax to pay off, over time, accrued benefits, and establish a modern, fully funded, progressive, individual-account, collective investment System as outlined here. This is a reform that both parties can embrace. Importantly, the new Personal Security Account System can be run on a single laptop, i.e., it requires and entails absolutely no involvement by Wall Street.

Should I Take My Social Security Early?

If, at worst, Social Security benefits are reduced by 22 percent starting in 2032, it will still behoove most people to wait at least until full retirement and, generally, age 70 to collect their retirement benefits. The payoff from waiting will be smaller, but remain substantial. This post explains why waiting to collect almost always makes sense. But no one should guess what’s best. For $49 you can get a year’s license to my company’s Maximize My Social Security (MMSS) software. The program has an option to specify a benefit cut of whatever size you wish to consider starting at any date you specify. Alternatively, you can license MaxiFi Planner, which does full economics-based financial planning, has the same Social Security code as MMSS, and was named “Best Personal Financial Planning Software of 2025” by Bankrate. It will answer any and all of your financial planning questions correctly, which is not something one can remotely say about other financial planning tools and, as described in a range of posts at larrykotlikoff.substack.com, certainly not say of AI.

Optimal Social Security benefit-collection strategies depend sensitively on your family’s circumstances. But know this. The typical Social Security claimant is leaving $182,000 on the table in failing to optimize their Social Security collection decisions. This study documents this remarkable finding. Hence, don’t just take the money and run. This can cost you a massive amount in lifetime benefits even with a 22 percent benefit cut starting in 2032 — something that would end the political careers of almost all members of Congress.

One final point. Much of what passes for fiscal reform is geared to improve the bottom lines of members of Congress. I’ve seen, over decades, from the outside and the inside, exactly how they make this sausage. It’s not pretty, but it is predictable. Since most members of Congress will surely wait till 70 to collect their Social Security, any cuts in benefits will likely come with some small, self-protective print that ensures that those who waited to collect their benefits will not be differentially penalized relative to those who took their benefits early.

2032 Is Just Beginning of Social Security’s Problem