It's safe to say that without Social Security millions of senior citizens would be struggling to pay their bills during retirement.
According to January's Social Security snapshot from the Social Security Administration (SSA), the average retired worker was bringing home $1,363 per month. This works out to a little more than $16,300 per year. Though that may not sound like a lot, it's enough to demonstrably lower the estimated senior poverty rate per the Center on Budget and Policy Priorities (CBPP). Estimates from the CBPP show that senior poverty rates with Social Security are just 8.8%, but they would be an estimated 40.5% without it. That's nearly a 32-percentage-point difference!
Unfortunately, America's most crucial social program is in trouble. The 2016 Social Security Board of Trustees report noted that the Social Security Trust would begin paying out more in benefits than it's receiving in revenue by 2020. What's more, by 2034 the program is projected to have exhausted its more than $2.8 trillion in spare cash.
To those unfamiliar with how Social Security's Trust is funded, it might appear that the program is working its way toward bankruptcy. In fact, roughly half of all millennials in a 2014 Pew Research Center survey believed that Social Security wouldn't be there for them when they retire.
Thankfully, there's some good news: Social Security isn't going bankrupt. The way the program is funded simply wouldn't allow for it.
How Social Security is funded
In 2015, Social Security received $920.2 billion in revenue, based on SSA data. This revenue was collected in three ways, with the corresponding weighting in parenthesis:
- Payroll taxes (86.4%)
- Interest (10.1%)
- Taxation of benefits (3.4%)
(The figures don't add to 100% due to rounding.)
Without question, payroll tax revenue is the most important for Social Security. Payroll taxes, which are officially known as FICA taxes, consist of a 15.3% tax that's usually split between employees and employers. 12.4% of this tax belongs to Social Security, with the remaining 2.9% going to Medicare. This means most workers are paying 6.2% of their income earned between $0.01 and $127,200 (the taxable earnings cap) to the Social Security Trust. As long as people are working, Social Security will always be collecting revenue. That's why it'll never go bankrupt -- though benefit cuts aren't out of the question.
Interest income earned on its spare cash comprised another 10.1% in 2015. This excess cash is invested in special issue bonds and, to a lesser extent, certificates of indebtedness. Because the Federal Reserve has kept interest rates near historic lows, the yields on recently issued bonds have been exceptionally low. By 2034, this interest income is expected to disappear entirely, if the Trustees report proves correct.
Finally, a small portion of Social Security's income (about $31.3 billion) came from the taxation of Social Security benefits. While it may not be a well-known fact, a portion of Social Security benefits becomes taxable if an individual or joint-filing couple crosses a certain earning threshold. Individuals and couples making more than $25,000 and $32,000, respectively, can have half of their Social Security benefits exposed to federal income tax, while individuals and couples making in excess of $34,000 and $44,000, respectively, can have 85% of their Social Security benefits exposed to federal income taxation.
According to The Senior Citizens League, more than 50% of seniors receiving Social Security benefits in 2015 paid tax on those benefits, compared to about 1 in 10 households when the lower tax threshold was first introduced in 1983.
Seniors overwhelmingly agree this needs to change
However, a new survey released two weeks ago from The Seniors Center, a Washington, D.C.-based nonprofit organization that aims to protect the rights of senior citizens, speaks volume about what seniors think of the taxation of benefits.
According to the survey results, a whopping 91% of the retired Americans that were surveyed felt that Social Security benefits should no longer be subject to taxation. They specifically cited the rising cost of living for seniors as the reason why benefits shouldn't be taxed. Overall, 68% of respondents said their healthcare costs have increased, with 88% affirming that their overall living expenses have risen.
The phase-out and eventual elimination of the taxation of benefits was one of the proposals called for in Rep. Sam Johnson's (R-Tx.) Social Security Reform Act of 2016, which was introduced in December. Phase-outs were set to begin in 2045, with the taxation of benefits ending entirely by 2054. Johnson's bill hasn't gained any traction in Congress.
In many ways seniors are right to be upset about the taxes they pay on their Social Security benefits. The reason is that these tax thresholds haven't been updated for inflation in 34 years. If they did keep up to date with inflation, far fewer people would be taxed on their benefits, which may improve the standard of living for seniors.
At the same time, eliminating the taxation of benefits would only speed up Social Security's cash flow problem.
A majority of the seniors surveyed also believed that the health of Social Security depended on the wealthy paying more. Some 78% of those surveyed wanted to see the maximum taxable earnings cap removed such that the wealthy pay FICA taxes on their full income. Some estimates suggest that removing the payroll tax earnings cap will nearly bridge the entire budgetary shortfall that Social Security is facing. However, it's worth pointing out that Republicans are generally against the idea of increasing the payroll tax on any Americans, including the wealthy.
Will Congress listen to what a majority of seniors want based on this latest study? That remains to be seen.