Social Security is going to run out. State pension reform can provide a lesson on how to save it.

Social Security reform is becoming a political albatross. While it is a popular program, it has long standing issues that Congress has refused to address since the last major reform in 1983. As the dire financial issues mount up and Social Security faces insolvency in less than 10 years, there is no doubt that it needs reform. Cash reserves are already being used to ensure that full benefits are paid every year and to backfill annual deficits. However, once these assets are gone, incoming payroll taxes will only be able to support around 80 percent of the projected benefit payments. The impending results are benefit cuts for millions of Americans.

This scenario can be avoided if Congress musters the political will to accept tough choices and pass legislation that reduces projected benefit payments or increases projected payroll taxes. The sooner Congress acts, the smaller these changes need to be.

While there is no federal guidebook for such a difficult challenge, the precedent set by state legislatures may provide a path to reform. In the aftermath of the 2008 Great Recession, state lawmakers faced similar challenges related to public employee pension plans. In order to stabilize these programs, Republican and Democrat state lawmakers took action, and every state has approved at least one pension reform since 2010. These reforms included the types of benefit reductions and contribution increases that Congress could use as a template to help close the social security funding gap. Of course, these reforms did not eliminate the pension problem—state and local pensions are estimated to remain underfunded by more than $1 trillion—but they did put states in a stronger position to pay down that deficit over time.

In a new report, R Street Institute governance policy fellow, Chris McIsaac, gives the history of these state-level reforms. He found that the most impactful reforms were often part of a legislative package that required Democrats and Republicans to share political risk and sacrifices. It is true that Social Security and pensions have fundamental differences in design and purpose. But, as McIsaac points out, the approach that states took serves as a useful model for Congress to improve the financial outlook of Social Security.

Using this model, the report lays out solutions that would require the same shared sacrifice and political risk. Specifically, there are two types of reform that could make a substantial impact on the long-term financial outlook of Social Security and that have been widely used in the context of public pension reform: Cost of living adjustment (COLA) reductions and payroll tax increases. The Social Security Administration estimates that a one percentage point reduction in the COLA could eliminate 54 percent of the long-term actuarial shortfall while a four percentage point increase in the payroll tax would fully eliminate the shortfall.

In states that passed pension reforms, every COLA reduction for retirees––arguably the most difficult and controversial type of pension reform––was approved with bipartisan support. They were also commonly approved as part of a reform package that required shared sacrifice across constituencies in states where power was shared between the two political parties. This reinforces the idea that divided government and a commitment to bipartisan cooperation are needed in order to implement reforms that distribute sacrifice and risk broadly across different constituencies.

Congress faces a daunting challenge to improve the sustainability of Social Security. By following the example of state leaders who reformed pensions in the wake of the Great Recession, Congress has an opportunity to overcome the long-standing reputation of Social Security as the third rail of American politics, and to strengthen the system in its effort to support millions of Americans who are retired or disabled.

To learn more, read “Lessons from the States on Entitlement Reform” here.