Regardless of whether you're already receiving a Social Security check or expecting to retire in two decades, Social Security income will likely play an important role in your ability to meet your monthly expenses during your golden years.
Gallup's 2015 national poll showed that 59% of retired seniors who are already receiving Social Security benefits rely on those benefits as their primary source of income. Meanwhile, an Insured Retirement Institute study on baby boomers who have not yet retired showed that 59% of boomers plan to rely on Social Security as their major income source during retirement.
Social Security's slippery slope
Given how much retirees and pre-retirees are counting on Social Security, it's troublesome how uncertain the program's future sustainability is.
According to the Social Security Board of Trustees 2016 report, the Old-Age, Survivors and Disability Insurance Trust (OASDI), which pays out Social Security benefits, will deplete its spare cash by the year 2034. Currently, this spare cash pile totals more than $2.8 trillion. Baby boomers are retiring in droves (and thus becoming eligible for Social Security). This, along with Americans' growing life expectancies, is weighing heavily on a program that, when it began paying benefits 75-plus years ago, wasn't prepared for the demographic changes we're experiencing now.
The result is that seniors relying on Social Security could be faced with benefit cuts of up to 21%, which could be necessary to extend the survival of the OASDI through 2090.
Three ways Congress is failing Social Security beneficiaries
Though unforeseen demographic changes are partly to blame for Social Security's current woes, lawmakers on Capitol Hill also deserve a wag of the finger. Here are three ways Congress has been failing Social Security beneficiaries.
1. Sticking with 33-year-old tax laws
First and foremost, Congress has been harming Social Security recipients by sticking with archaic Social Security tax legislation that was implemented 33 years ago.
In 1983, Congress passed amendments that allowed the Internal Revenue Service to collect taxes on Social Security recipients who made too much money. Back in 1983, individuals who were earning more than $25,000 annually, or couples with household income exceeding $32,000 annually, could have up to 50% of their Social Security benefits taxed. This tax was designed to affect about 10% of the population.
In 1993, as part of the Omnibus Budget Reconciliation Act, another tier of Social Security taxation was added. Individuals earning more than $34,000 annually, or joint-filers making $44,000 annually, could have 85% of their Social Security benefits taxed. In 1993, about 18% of beneficiaries owed some tax on their benefits.
As of 2015, more than half of all households receiving Social Security benefits are paying federal income tax on those benefits, according to The Senior Citizens League (TSCL). Because Congress hasn't adjusted the income thresholds to account for inflation, middle-class Americans who may be heavily reliant on their Social Security income could be forced to pay this tax. TSCL estimates that if the tax thresholds had been adjusted for inflation between 1983 and 2015, then the tax on individuals wouldn't kick in until $57,107 in income, and joint filers wouldn't be hit with the tax until their income exceeded $73,097.
Congress' failure to adjust this archaic tax law is hurting a majority of Social Security recipients.
2. Not keeping up with medical inflation
Congress hasn't just dropped the ball on taxation. It has also been lollygagging when it comes to adjusting benefits to keep up with inflation.
Benefits paid from the OASDI are adjusted annually based on the Consumer Price Index for Urban Wage Workers and Clerical Workers, commonly known as the CPI-W. When the CPI-W increases, Social Security beneficiaries get a boost in their benefits next year. If it falls, benefits stay the same.
But here's the problem with the CPI-W: It's based on the spending habits of workers -- not seniors, who make up two-thirds of all Social Security beneficiaries.
A separate measure of inflation known as the Consumer Price Index for the Elderly, or CPI-E, measures the spending habits of seniors aged 62 and up. A direct comparison of the CPI-E and CPI-W from December 2011 shows that seniors spend twice as much of their money on medical care than the workers counted in the CPI-W, and they also spend around 5 percentage points more on housing. CPI-W statistics tend to be more skewed toward spending on food and beverages, transportation, education, and apparel. In other words, seniors' benefit increases are being tied to things that don't matter as much to them, meaning they're losing some of their purchasing power due to high medical inflation.
3. Sweeping reform discussions under the rug
Finally, Congress has been guilty of suppressing serious discussion of reform for a very long time.
It's been apparent for more than a decade that the OASDI was on a slippery slope and that reforms would eventually need to be enacted. Few lawmakers on Capitol Hill would deny that the program needs a helping hand. However, what the reforms should look like remains up for debate.
In an informal online poll, The Washington Post observed that raising the payroll tax earnings cap is by far the most popular option to fix Social Security among the American public. Currently, earned income below $118,500 is subject to the payroll tax, whereas income above this amount is free and clear. For working-class Americans who pay into Social Security with every cent of income they earn, this doesn't seem too fair, which explains the broad support for requiring well-to-do persons to pay more into the program.
Other semi-popular solutions to fixing Social Security have involved raising the retirement age in order to encourage people to work longer and delay their benefits, as well as using the aforementioned CPI-E instead of the CPI-W to measure inflation.
But the big problem is that the longer Congress sits on its hands, the more expensive a "fix" for Social Security becomes. Right now, based on the Trustees' report, a 2.66% payroll tax increase -- which would probably be split down the middle between you and your employer -- would bridge the budgetary shortfall for the next 75 years. If Congress continues to wait, the tax increase needed could easily surpass 3%.
Congress' indecisiveness could wind up costing seniors and baby boomers the retirement they deserve.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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