Social Security is arguably the most important program in place for our nation's retired workers. According to the Social Security Administration, more than 60% of retired workers count on their Social Security benefits to comprise at least half of their monthly income during their golden years. Without that income, it's likely that quite a few seniors would be in financial trouble and unable to make ends meet. Just how many, you wonder? That's a question that's now been answered by the Center on Budget and Policy Priorities (CBPP).
Social Security's impact on reducing poverty rates
Researchers at the CBPP used the Census Bureau's definition of poverty, which in 2015 meant $11,367 or less for an elderly individual, $14,342 or lower for an elderly couple, and $24,257 or less for the average family of four, and compared poverty rates for the elderly (ages 65 and up), adults (ages 18-64), and children (under age 18) with and without Social Security benefits.
The findings showed that Social Security benefits have kept nearly 22.1 million Americans out of poverty, with a reduction in poverty rates observed in all 50 states and Washington, D.C. As you might have rightly imagined, the bulk of those being kept out of poverty are elderly Americans, which comprise about two-thirds of all enrollees to begin with. However, children and adults younger than 65 benefited, too.
In total, 15.07 million elderly folks, 5.94 million adults, and 1.08 million children are all lifted above the poverty rate thanks to monthly Social Security payments. For all ages, Social Security reduces the estimated poverty rate in American 7 full percentage points to 13.5% from an estimated 20.5%. But the biggest effect is seen on seniors.
As you can see above, without Social Security income, just over four in 10 seniors would be living at or below the poverty rate. With Social Security income, just 8.8% of seniors are living in poverty. We'd obviously like to see that figure fall to 0%, but for such a vulnerable group of individuals who may not have other forms of income beyond Social Security, this data would imply that the program is doing its job.
As a caveat, it's worth pointing out that the CBPP's analysis excluding Social Security is imperfect. For instance, the authors point out that if Social Security didn't exist, seniors would likely have saved more money and considered moving in with one of their children to avoid the costs of housing. CBPP's analysis doesn't factor these potential changes into its calculations. Nonetheless, the data does clearly suggest that Social Security has been invaluable to the financial well-being of seniors.
Social Security's future remains cloudy
Unfortunately, the future of Social Security remains somewhat cloudy, meaning poverty rates for elderly Americans may not remain below the national average for too much longer.
According to the Social Security Board of Trustees 2016 report, the more than $2.8 trillion in spare cash the program currently has is slated to be exhausted by the year 2034. If no spare cash remains, Social Security essentially becomes a budget-neutral program, with benefits needing to be cut by as much as 21% across the board.
Increasing life expectancies is one reason Social Security's spare cash pile is expected to be whittled away. Average American life expectancies have increased by nine years since the mid-1960s, meaning seniors can draw a payment for a longer period of time than the architects of Social Security had originally accounted for.
The other issue is that baby boomers are retiring in increasing numbers, thus pushing the worker-to-beneficiary ratio lower. In easy-to-understand terms, not enough new workers and/or payroll tax revenue is being generated to account for the millions of baby boomers that'll be retiring over the next decade and a half. By 2020, the Trustees predict that Social Security's cash inflow will turn into a cash outflow, ultimately resulting in the aforementioned exhaustion of the program's spare cash by 2034.
Congress and President-elect Donald Trump are likely going to have their work cut out of for them when it comes to fixing Social Security. Yet, Trump himself hasn't offered any particular proposals to fix Social Security. Instead, Trump plans to leave the program as is and indirectly approach the problem by cutting taxes on individuals and corporations and reinvesting up to $1 trillion in infrastructure over the next decade. Presumably, if U.S. GDP growth accelerates, so will job growth and wages, leading to more payroll tax collection.
There are a lot of question marks surrounding Trump's economic proposals, but Social Security's future, and along with it the long-term poverty rate for the elderly, appears to hinge on the outcome of Trump's proposals, at least for the time being.
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.
The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.