Social Security’s Unfunded Obligation Now at $28 Trillion: It’s Time to Rethink the Program

US Retirement Reform Lessons from Canada, Germany, New Zealand, and Sweden

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The Social Security Trustees released their annual report today—and the outlook is bleak. The program is barreling toward insolvency—and fast. The trust fund is projected to run dry in 2033, triggering an automatic 23 percent benefit cut—a 10 percent increase from last year’s projected 21 percent benefit cut. The program’s 75-year unfunded obligation—the difference between the present value of projected spending and revenues—has increased from last year’s estimate of $25 trillion to about $28 trillion (these figures exclude trust fund reserves, which are irrelevant from a unified budget perspective).

This significant worsening of the program’s finances since last year is largely the result of the repeal of the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO)—a costly, bipartisan election-year giveaway masquerading as reform. Instead of tackling Social Security’s structural imbalances, Congress chose to increase benefits for a vocal minority—accelerating the program’s insolvency in the process. Pair this with the proposed expansion of seniors’ tax benefits by Republicans in the so-called One Big Beautiful Bill Act (more like One Big Bloated Blunder Act), and the message is clear: Washington is still in giveaway mode while the program’s structural shortfalls deepen.

It doesn’t have to be this way.

Many countries facing similar pressures have already taken tough but effective steps to reform their pension systems. In our new Cato Institute policy analysis, set for release next Monday, we explore how Canada, Germany, New Zealand, and Sweden responded to common challenges like aging populations—and what US lawmakers can learn from their reforms.

These insights will be featured more extensively in Reimagining Social Security: Global Lessons for Retirement Policy Changes, a forthcoming Cato Institute book to be released on the program’s 90^th anniversary in August 2025.

The Case for Reform

Social Security was created to protect seniors from poverty—not to offer escalating payouts to high earners. But today, the program pays excessive benefits to those with high lifetime earnings— well beyond what is needed to keep seniors out of poverty. A retiree who earned the maximum taxable amount and delays claiming benefits until age 70 now receives over $61,000 per year—four times the senior poverty threshold. These outsized benefits for well-off retirees are a key driver of the program’s financial problems.

Other countries have taken a different path—structuring their pension systems around more affordable, anti-poverty-focused models.

Flat Benefits: A Simpler, More Affordable Model

New Zealand’s retirement system offers a universal basic pension—roughly $21,400 per year (adjusted for US purchasing power)—to all seniors who meet residency requirements. This program, called the New Zealand Superannuation (NZS), is simpler and less expensive than the US system. New Zealand spends about 37 percent less per capita on NZS than the United States does on Social Security.

Sweden’s retirement system also includes a basic benefit—the Guarantee Pension—but phases it out for seniors who receive more than a modest income from Sweden’s earnings-based Income Pension. Sweden spends less than 1 percent of its GDP on the Guarantee Pension, which contributes to the senior material and social deprivation rate of just 1.9 percent, the lowest in Europe.

The United States could achieve substantial savings by adopting a flat benefit structure for Social Security. The Congressional Budget Office estimates that replacing the current earnings-related structure for all new beneficiaries beginning in 2026 with a uniform benefit set at 125 percent of the federal poverty level would eliminate the program’s long-term deficit and save over $600 billion in the first eight years.

Some policymakers may prefer to maintain an earnings-related structure. If so, they should consider Canada’s more modest model. The average benefit of the Canada Pension Plan (CPP)—which is also an earnings-based program—was about $665 per month in 2023, with a maximum of around $1,200 in 2025 for those retiring at age 65. That’s a far cry from the United States, where average monthly Social Security benefits exceeded $1,900 in 2023, and the highest benefit for those retiring at age 65 exceeds $4,000 in 2025.

Automatic Stabilizers to Maintain Solvency

Social Security reform is notoriously politically fraught—the so-called “third rail” of American politics. One of the most important missed opportunities in past reform efforts was the failure to establish automatic adjustments that would take some of the politics out of maintaining sustainability.

Other countries have shown how this can work. Sweden will soon link its pension eligibility ages to life expectancy. Furthermore, if Sweden’s Income Pension liabilities exceed assets, benefit growth slows automatically. Germany has a similar mechanism that is triggered when the ratio of pensioners to contributors rises. Canada freezes CPP benefit growth and raises taxes if the program is deemed unsustainable over 75 years. These automatic stabilizers help pension systems stay solvent within their original policy intent without the need for political wrangling—and they could do the same for Social Security.

A Social Security automatic mechanism should align the program’s spending with its revenues. For example, Americans for Prosperity’s Kurt Couchman suggests reducing replacement rates for higher earners as a potential automatic stabilizer beyond eligibility age changes when the program is in imbalance.

Encouraging Private Savings

Reform shouldn’t just be about cutting benefits for higher earners—it should also empower Americans to save more on their own.

Canada’s Tax-Free Savings Accounts (TFSAs), introduced in 2009, offer a flexible way to save for retirement or other needs. Unlike 401(k)s, TFSAs don’t penalize early withdrawals, making them especially attractive to younger and lower-income workers who may need savings for education, emergencies, or other immediate needs.

The United States should consider establishing similar universal savings accounts (USAs). These tools could help more Americans build financial security, regardless of what happens to Social Security.

Don’t Wait for the Crisis

Other countries haven’t waited until their systems collapsed to act. They made politically difficult choices in advance to preserve the core promise of government-provided retirement benefits in the face of aging demographics. It’s not too late for the United States to follow the course. But the window is closing. The longer Congress waits to act, the more painful the fixes will become—for workers, retirees, and US bondholders. As the Social Security Trustees warn:

The Trustees recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust.

As Social Security’s insolvency date approaches and the program’s cash-flow deficits grow, gradual benefit reforms become less viable—likely prompting lawmakers to rush tax hikes that would hurt economic growth, or worse, borrow trillions more in an attempt to avoid tough choices and thereby accelerate a debt crisis.

In our upcoming policy analysis, we offer a roadmap based on the real-world experiences of other developed nations that provides concrete options on how to tackle common government old-age provision challenges. US legislators should consider structural reforms that modernize Social Security to reflect 21^st century demographic and economic conditions, focus government benefits on seniors in need, and restore fiscal sustainability without burdening younger generations with higher taxes.