Social Security is, arguably, the U.S.'s most successful and relied-upon social program. When national pollster Gallup surveyed retired beneficiaries and future retirees in April, it found that 89% of the currently retired lean on their monthly benefit to some degree to make ends meet. Meanwhile, a combined 84% of nonretirees believe they'll need Social Security income as a "major" or "minor" source of income when they leave the workforce.
Considering how vital Social Security is to the financial well-being of our nation's current and future retirees, the success and longevity of the program are paramount. Unfortunately, the latest data from the 2022 Social Security Board of Trustees Report suggests the program's future remains dicey, at best.
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Say goodbye to nearly a quarter of your Social Security retirement benefit?
For each of the past 82 years, the lengthy Social Security Board of Trustees Report has provided a public look at the program's incoming revenue, outgoing spending, and the many variables that make up its intermediate (10-year) and long-term (75-year) projections. Although these projections are fluid and subject to change, this report has been sounding warning bells about Social Security's future since the mid-1980s. The 2022 report is no different.
According to the newest projections, the entire Social Security program, which includes the Old-Age and Survivors Trust (OASI) and Disability Insurance Trust (DI), is facing a $20.4 trillion cash shortfall between 2022 and 2096. But things become troublesome for Social Security's most vital component well before the 2090s.
Based on the latest estimate, the OASI is expected to deplete its asset reserves -- the extra revenue the program has brought in since inception that's invested in special-issue bonds -- by 2034. That's $2.753 trillion, as of Dec. 31, 2021, forecast to be completely gone in about 12 years.
On one hand, it's incredibly important to understand that depleting the OASI's asset reserves does not -- I repeat, does not -- mean the program is insolvent or that benefit payouts disappear. As long as people keep working, payroll tax revenue will be collected. The payroll tax on earned income is what provides the bulk of revenue for Social Security. If you qualify for a retired worker benefit, you're going to receive a monthly payout, when eligible.
However, the amount you receive could be significantly lower than anticipated. The 2022 Trustees Report estimates that once the OASI's asset reserves are depleted, it'll only be able to pay out 77% of estimated benefits through 2096. In simpler terms, retired workers and survivor beneficiaries could see a 23% reduction to their monthly Social Security payout by 2034. Even though this is a year later than the 2021 Trustees Report projected, it's not a comforting outlook for current and future retirees.
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Social Security is contending with a multitude of headwinds
Although the COVID-19 pandemic has done Social Security no favors, it's not to blame for the expected benefit haircut come 2034 for retired workers. Rather, over a half-dozen demographic shifts and macro factors have been working against Social Security for a long time.
Some of these changes you're probably well aware of, and just haven't paid close attention to in the context of how they might be hurting or straining the Social Security program. For example, baby boomers have been leaving the labor force in growing numbers, and there simply aren't enough new workers to take their place, which has weighed down the worker-to-beneficiary ratio. To add, we're also living longer, which has put more strain on a program that wasn't designed to pay senior citizens for decades after their retirement.
Meanwhile, a bevy of demographic shifts that concern birth rates, immigration, and income inequality have worked against Social Security.
According to a report from the Centers for Disease Control and Prevention (CDC), the U.S. fertility rate -- a hypothetical measure of how many babies a group of 1,000 women would have over their lifetime -- hit an all-time low of 1.6 in 2020. The CDC notes that the U.S. fertility rate needs to be 2.1 for a generation to replace itself. Fewer births will almost certainly weigh on the worker-to-beneficiary ratio and result in less future payroll tax revenue being collected.
Something you might not realize about Social Security is that the program is reliant on a steady stream of legal immigrants into the United States. Immigrants to the U.S. tend to be younger, and therefore spend decades in the workforce generating payroll tax revenue for the program. Since the mid-1990s, immigration into the U.S. has nearly been halved.
Rising income inequality is a problem, too. Earned income above $147,000 is exempt from the payroll tax (as of 2022). In 2016, this payroll tax earnings cap allowed $1.2 trillion worth of earned income to escape taxation.
To boot, the rich have few or no monetary constraints when it comes to accessing preventative medical care or prescription drugs. As a result, the well-to-do tend to live longer and collect a bigger monthly benefit than the folks who actually rely on Social Security for their financial well-being in retirement.
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But wait -- there's more
If there is a silver lining to all these issues, it's that lawmakers on Capitol Hill have, historically, come to Social Security's rescue in the 11th hour.
With the program facing similar asset reserve depletion concerns in the early 1980s, Congress passed, and then-President Ronald Reagan signed, what became known as the Social Security Amendments of 1983. This was the last sweeping, bipartisan overhaul of Social Security, which ultimately introduced the taxation of benefits, gradually increased the full retirement age to 67, and steadily lifted the payroll tax rate on earned income. At least history would suggest a good likelihood of lawmakers eventually stepping in with another solution to shore up Social Security.
However, Social Security's issues extend beyond just the demographic shifts described earlier. Even if lawmakers pass bipartisan legislation to strengthen the OASI before 2034, the purchasing power of Social Security income is liable to keep declining.
The Senior Citizens League, a nonpartisan senior advocacy group, released a report in May that examined the effect of inflation on retired beneficiaries since 2000. Whereas the program's aggregate cost-of-living adjustments (COLAs) have totaled 64% since 2000, an estimated increase of 130% is what would have been needed to keep up with the rising costs seniors are facing. The end result is a 40% loss of purchasing power for Social Security income in 22 years.
Fixing this issue could prove even tougher. Although lawmakers from both parties recognize that Social Security isn't doing a good job of accurately accounting for the inflation retired workers are contending with, neither political party has been willing to work with the other to find a common-ground solution.
Whether it's a 23% benefit cut come 2034 due to the OASI's asset reserves being depleted, or the persistent loss of purchasing power, Social Security's retired workers are facing an uncertain future.
