The Social Security program has been providing a financial foundation for our nation’s retired workforce for more than 80 years. Of today’s nearly 65 million beneficiaries, 46 million of them are retirees, many of whom lean on their monthly payout to make ends meet.
In April, national pollster Gallup released an annual survey concerning retirees’ reliance on the program. Gallup’s poll showed that 89% of currently retired beneficiaries lean on their Social Security as either a major or minor source of income. That’s only 1 percentage point below the all-time high registered for this annual poll, which began back in 2002.
In other words, Social Security is essential to the financial well-being of our nation’s elderly — and it also happens to be in serious trouble.
A big cut to Social Security retirement benefits may not be far off
Every year since payouts began in 1940, the Social Security Board of Trustees has released a report that examines the short-term (10-year) and long-term (75-year) outlook for the program. The Trustees take into account fiscal and monetary policy changes, as well as other demographic factors, to examine how financially stable our country’s most important social program is over various periods of time. Since 1985, the Trustees have been sounding the alarm.
For each of the past 35 years, the Trustees report has noted that the program’s outlays would outpace revenue collection over the long-term. This is a fancy way of saying that Social Security has unfunded obligations that aren’t yet accounted for from a revenue-collection perspective over the next 75 years. In the 2020 report, this projected cash shortfall over the next 75 years increased by a whopping $2.9 trillion from the previous years’ report to $16.8 trillion.
Why the big jump? According to the report, the Board of Trustees lowered its outlook for the real interest rate by 20 basis points to 2.3%, lowered its modeling for consumer price inflation by 20 basis points to 2.4%, and modestly reduced its long-term fertility rate per woman to 1.95 births per woman from 2.0.
Furthermore, the report predicts that Social Security’s $2.9 trillion in asset reserves — i.e., its net cash surpluses built up since inception — will be completed exhausted by 2035. This is unchanged from the 2019 report.
If lawmakers are unable to enact a fix, the Trustees report suggests that retired workers could face an across-the-board benefit cut of up to 24% by 2035 in order to keep the program solvent through 2094.
Here’s what’s behind Social Security’s shortcomings
You’re probably wondering why the greatest social program in our history finds itself on such shaky financial footing. The answer to this question lies with an assortment of contributing factors.
Much blame is assigned to baby boomers for retiring and claiming Social Security benefits. While there’s little question that this labor force exodus is weighing on the worker-to-beneficiary ratio, I’m not a fan of blaming an entire generation for simply being born, especially when they’ve paid their dues into Social Security through decades of work. Rather, there are four other big demographic shifts at play.
First, we’ve witnessed a pretty substantive uptick in longevity since Social Security payouts began in 1940. In 80 years, the average U.S. life expectancy at birth has risen by more than 14 years. Comparatively, the full retirement age — i.e., the age where a retiree can receive 100% of their monthly payout, as determined by their birth year — will have increased by a mere two years (from 65 to 67) between 1940 and 2022. People are living longer than ever, and are therefore able to receive a benefit for decades, thus straining Social Security.
Second, income disparity is a serious problem. Not only are the wealthy able to avoid paying into Social Security on some, or perhaps most, of their earned income, but they also have few to no financial constraints when it comes to receiving medical care or prescription medicine. As a result, the well-to-do are substantially outliving everyone else and collecting a big monthly payout in the process.
Third, birth rates have declined over the past decade. The Social Security program relies on a steady level of births to offset the retirement of workers in the future. With the U.S. birth rate hitting an all-time low in 2019, we can expect the worker-to-beneficiary ratio to face further pressure.
Lastly, even net immigration into the U.S. has been a problem. Social Security counts on a certain number of net migrants entering the U.S. every year to help support the program. Most migrants tend to be younger, and will therefore spend decades contributing to Social Security via the payroll tax. Over the past two decades, net legal immigration into the U.S. has been halved.
A congressional stalemate is making things worse
Now that you have a better idea of what’s behind a possible 24% benefit cut for retired workers in 15 years, you’d probably assume that lawmakers are hard at work on Capitol Hill trying to strengthen Social Security — but you’d be wrong.
One of the biggest problems with fixing Social Security is any feasible fix would leave some people worse off. For example, if taxation is increased to raise revenue, some people will pay more into the program and may not see a commensurate increase in benefits when they retire. Since no changes to the program can be made without some group of people coming out worse for the wear, lawmakers have been gun-shy about enacting a fix.
Another key problem is that each party has a solution to fix Social Security that works — and since they both work, neither side feels compelled to find common ground with their opposition.
For instance, Republicans want to gradually raise the full retirement age to 70. This would require future generations of retirees to choose between waiting longer to collect their full payout and accepting a steeper reduction to their monthly payout if claiming early. No matter their choice, lifetime benefits would be reduced.
Meanwhile, Democrats prefer increasing or eliminating the payroll tax cap associated with the 12.4% payroll tax ($137,700, as of 2020). Increasing or removing this cap would require the well-to-do to pay more into Social Security.
The fact is that both plans have flaws. However, they work pretty seamlessly when combined as a bipartisan solution. The question is, how long will it take our elected official on Capitol Hill to realize this important piece of information? Hopefully sooner than 15 years.
