Solutions Economic and Market Watch

Welcome to the Economic and Market Watch podcast for the week of June 2, 2025. This is Antony Davies.

The Social Security Board of Trustees is supposed to submit an annual report to Congress each April 1, but the trustees have a history of regarding the law as drivers do speed limits. They rarely come in under the requirement and often exceed it by a wide margin. As of today, there's no sign of the 2025 report, but it will likely say the same thing as the previous 50 reports: The Social Security Trust Fund is drying up.

What's new this year is that the end of the retirement portion of Social Security is firmly in sight — at most two presidential administrations away. The bad news for co-ops is that the fallout will hit rural communities hardest.

The trustees estimate that within the next eight years, one of three things must happen. Workers must pay more taxes, retirees must receive less benefits, or the government must borrow more money.

To keep the program solvent, payroll taxes would have to rise from the current 12.4% to over 16%. That might not sound like much, but it translates to around $40 per paycheck for the median full-time worker, and that's not counting the employer's portion of the payroll tax. The hike in the employer's half of the payroll tax will play out as lower wages or fewer jobs or higher prices. But no matter how it breaks, the hike in the employer's half of the tax will fall on the shoulders of workers and consumers. Alternatively, the government could cut benefits, but that would mean retirees losing 20% of their Social Security checks. And when half of retirees rely on Social Security for half of their incomes and a quarter rely on Social Security for 90% of their incomes, cutting benefits is a nonstarter.

But whether tax hikes or benefit cuts, rural Americans have more skin in the game than anyone else. Being self-employed, many farmers and ranchers pay both halves of the payroll tax. That means that a tax hike that costs the median worker $40 each paycheck costs the typical farmer or rancher twice that. There's a similar story when it comes to benefit cuts. Across the country, 20% of people in rural counties receive Social Security retirement benefits, versus only 17% in urban counties. This means that Social Security cuts would disproportionately fall on rural Americans.

A popular suggestion is to remove the cap on Social Security taxes. Currently, the payroll tax only applies to the first $176,000 in wage income. People who earn more than this continue to pay income tax on the additional amount, but not payroll tax.

Discussions surrounding the cap usually focus on millionaires and so overlook an important affected group, small business owners. According to the Federal Reserve, the median business owner with between two and five employees has a family income of $135,000. The median business owner with more than five employees has a family income of $237,000. This puts the median small business owner near or above the cap. Removing the Social Security wage cap would slap a 12% tax on the additional portion of these business owners' incomes.

For owners both above and near the cap, this makes it less profitable to expand their businesses and so less profitable to create more jobs. Here again, the brunt of the pain falls on rural America. According to Census Bureau numbers, small businesses are 20% more likely to be located in rural areas than in urban.

Beyond hiking taxes and cutting benefits, there is a third option: Borrow the money. But that would add around $700 billion to each year's deficit. And with all three major rating agencies having downgraded the government's debt, markets won't look kindly on the government turbocharging an already 13-digit deficit. Yet here too, the fallout hits rural co-ops. The more the government borrows, the more upward pressure it puts on long-term interest rates, and that comes back to cooops as increased borrowing costs. If the Fed steps in to counteract the upward pressure on interest rates, that will put upward pressure on inflation, and that comes back to co-ops as higher material and equipment prices and upward pressure on wages. The conclusion is that there's no such thing as a free lunch.

Everything we choose to do, including maintaining a government sponsored retirement plan, carries a price. We can hide the price. We can push it on to others. We can even make it worse, but we can't eliminate it. At some point, over the next eight years, we're going to have to decide how we want to pay this one.

This is Antony Davies for the Economic and Market Watch podcast. Thank you for listening. Remember to download the Economic and Market Watch intelligence brief and dashboard, and send us email at economicresearch@nrucfc.cop.