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For many Americans, Social Security is an invaluable lifeline that'll help them make ends meet during their golden years. A majority of current retirees count on Social Security for at least half of their monthly income, and because Americans are such poor savers relative to people in other developed countries, this pattern is unlikely to change as baby boomers leave the workforce.
However, Social Security was only designed to replace about 40% of a worker's wage-based income -- it was never meant to be someone's sole source of income during retirement. As of the November snapshot from the Social Security Administration, the median retired worker was netting about $1,355 per month, or just $16,260 per year. By comparison, the federal poverty level in 2017 for a single person is $11,880. In other words, the average unmarried Social Security recipient is already dangerously close to the poverty level if their sole source of income is Social Security.
Despite this, the Centers on Budget and Policy Priorities has estimated that without Social Security income, more than 40% of elderly Americans would be living in poverty. With this income in place, just 8.5% are living below the poverty line.
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The surprising reason Social Security checks are being reduced
But for some 173,000 Social Security recipients in 2015, some of whom are retired workers while others are receiving Social Security disability payments, that income lifeline is being chipped away. What's to blame, you wonder? Look no further than student loan debt.
According to a recently released 83-page report from the Government Accountability Office (GAO), the federal government reduced monthly Social Security checks to 173,000 beneficiaries in 2015 who had defaulted on their student loan debt and were still paying it down. That's up 380% from the 36,000 beneficiaries who saw their Social Security checks reduced due to student loan defaults in 2002.
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The data is pretty clear: fewer older Americans hold student debt than the younger generation. Unfortunately, the number of those older Americans who have student loan debt has been rising at a much faster rate than younger folks. Since 2005, the number of borrowers between the ages of 25 to 49 holding student loan debt grew by 62%. Comparatively, those between ages 50 to 64, and those aged 65 and up, grew by 119% and 385%, respectively. In terms of the cumulative dollar value of these student loans, the roughly 870,000 elderly Americans aged 65 and up have seen their share of student loan debt grow by a factor of 10, from $2 billion to $22 billion, in a decade.
Social Security garnishments aren't the answer
According to the GAO report, about 43% of older borrowers (defined as persons 50 and up) have had their student loan debt for at least 20 years, a majority owed less than $10,000, and many were paying the maximum allowable offset of 15% of their monthly Social Security payment. The GAO report suggests this works out to a little more than $140 a month, on average.
Still, this offset is hardly making a dent on the principal because of the $15 fee imposed by the Social Security Administration each month, as well as the interest from the student loan. The report states that more than a third of older Americans were still in debt after two years of having their benefits garnished. Furthermore, garnishing Social Security checks wound up pushing 67,300 beneficiaries below the poverty level in 2015 compared to just 8,300 such instances in 2004.
Image source: Government Accountability Office.
An increase in the number of older Americans with student loan debt is partly to blame, but there's another major problem. In 1998, the federal government set the threshold for Social Security income offsets at $750 in benefits per month. In other words, the federal government has to leave at least $750 in benefits untouched, even if there's a debt default, in order to prevent undue financial hardship. However, this $750 threshold hasn't been adjusted for inflation in 18 years! It only guarantees Social Security recipients $9,000 in annual income, while allowing the government to continue to take monthly income from sub-poverty level retirees and disabled persons who've defaulted on student loan debt. If the threshold had merely kept pace with inflation, in 2013 it would have been $1,073.
Can this be fixed?
What's more, this problem may only get worse. Baby boomers aged 50 to 64 have seen their amount of student loan debt held grow from $43 billion in 2005 to $183 billion by 2015. Thus, we could see the number of beneficiaries facing an offset grow steadily in the years and decades to come.
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The GAO did offer a handful of solutions that may lessen the issues student loan debt is causing Social Security recipients. To begin with, GAO suggests that the federal government update its 18-year-old offset thresholds, which are clearly hurting tens of thousands of beneficiaries who are near or below the poverty line. By adjusting this threshold to reflect cost-of-living increases, well over 40,000 Social Security recipients would probably no longer qualify to have their monthly payouts garnished for a defaulted student loan.
The GAO also suggests that beneficiaries look into whether or not they may be able to reduce or discharge their debt through a total and permanent disability discharge, or TPD. If you have a disability that isn't expected to improve, and you can verify annually that your income is compromised by your disability, the federal government may reduce or discharge your debt completely. Additionally, the GAO requested the federal government provide clearer documentation on TPD requirements that could result in permitted payment relief.
But perhaps the biggest issue is that the student loan debt crisis is only affecting 870,000 of the more than 40 million elderly Americans. Until it becomes a visible problem that affects a significantly larger number of elderly Americans (i.e., until Gen X and baby boomers begin entering retirement with a large amount of student debt), it could be difficult to get Congress to do much of anything. For the time being, we can only mind our own expenses and hope that lawmakers wake up before it's too late.
