When Social Security was conceived back in the mid-1930s, it was designed to be a supplemental income source for our nation's low-income workers during retirement. But over the past 80-plus years, Social Security has evolved, possibly for the worse.
For more than 60% of our nation's retired workers receiving benefits, it now represents a major source of their monthly income. In other words, without Social Security income, the poverty rate among seniors would probably soar. An analysis from the Center of Budget and Policy Priorities confirmed this point by estimating a greater than 40% poverty rate among seniors if Social Security income wasn't available.
What will Social Security look like in 20 years?
One of the biggest ongoing debates on Capitol Hill is what the future might hold for Social Security, both for current retirees and those who will be retiring 20 years from now. The question being asked is: Can folks retiring in 2037 expect a similar level of benefits, adjusted for inflation, as those retirees receiving benefits in 2017?
If Congress does nothing, the answer is an almost certain "no."
According to the annually released Social Security Board of Trustees report from 2016, the Old-Age, Survivors, and Disability Insurance (OASDI) Trust is on track for some major changes over the next two decades.
By the trustees' estimates, the OASDI will be paying out more in benefits than it's receiving in revenue by 2020. This is due to a confluence of factors that includes lengthening life expectancies, the fact that the rich are living considerably longer than the poor (and receiving a larger monthly payout in the process), and the ongoing retirement of baby boomers, which is weighing on the worker-to-beneficiary ratio. Ultimately, the $2.85 trillion currently in asset reserves is projected to be completely gone by 2034.
What happens then? Essentially, Social Security would become a budget-neutral program and benefits would be slashed for current and future retirees by as much a 21%. It would pay out only what revenue it's able to bring in.
A notable source of revenue would disappear
Social Security generates its revenue three ways: payroll taxes, interest earned on its asset reserves, and the taxation of benefits.
The taxation of benefits accounted for only 3.4% of the $920.2 billion the program generated in 2015. More seniors than ever are being exposed to federal taxation on their benefits since the federal income thresholds for taxation ($25,000 or more in adjusted gross income for an individual, and $32,000 or more for a couple filing jointly) haven't been adjusted for inflation since 1983! Still, we're talking about only $31 billion in revenue generation in 2015.
The bulk of the program's revenue comes from the payroll tax on earned income. Workers are required to pay 12.4% of their earned income between $0.01 and $127,200 (the maximum taxable cap as of 2017) into Social Security. However, most workers are responsible for only half of this amount (6.2%), with their employer picking up the other half. The self-employed are responsible for the full 12.4%. In 2015, the payroll tax supplied 86.4% of the $920.2 billion for Social Security, and it's the sole reason the program can never go bankrupt. As long as people are working, payroll-tax revenue is being collected, which can be distributed to eligible beneficiaries.
But without the programs' $2.85 trillion in asset reserves, interest income would all but disappear gradually between 2020 and 2034. That's notable, because Social Security generated nearly $93 billion (10.1% of the $920.2 billion) in interest income on special issue bonds and certificates of indebtedness in 2015.
If Congress does nothing and allows Social Security to continue on its current path, the trustees predict that a sizable benefits cut is in your future.
Here's the kicker: Two really good solutions exist
You might be wondering what on Earth is holding Congress back from fixing Social Security for current and future retirees. Let it be known that solutions aren't the issue. The problem is that Democrats and Republicans have a really good idea about how Social Security should be fixed, and both of their ideas would work. But since they both work, neither side is willing to back down on its own idea or work with the other party.
The Democrats' fix is to raise the maximum earnings tax cap, or eliminate it entirely. Right now, 90% of workers are taxed on every dollar they earn between $0.01 and $127,200. That means the top 10% of income earners get a free pass on some or most of their wages. Raising the maximum taxable earnings cap would require the rich to pay more into Social Security. Since it affects such a small percentage of the population, it's often the most-supported solution. The only downside with lifting the maximum earnings cap is it does nothing for the wealthy, who are capped with what they can receive in monthly Social Security benefits ($2,687 as of 2017).
Republicans' fix involves progressively raising the full retirement age for future retirees. By 2022, the full retirement age (FRA), or the age at which the Social Security Administration deems you eligible to receive 100% of your benefits, will peak at age 67 for those born in 1960 and later. But life expectancies have been rising at a quicker pace than the FRA. Raising the full retirement age to somewhere between 68 and 70 would take into account lengthening life expectancies and probably coerce seniors to wait longer to retire. The downside? Seniors have to wait longer to receive their full benefit, or they would have to be willing to accept an even steeper cut in benefits if they retired early.
If Congress does nothing, Social Security won't be nearly as appealing an income source for retirees come 2037.