Social Security is, for millions of retired Americans, a critical source of income during their golden years. According to data from the Social Security Administration (SSA), a little more than three out of five retired workers relies on their monthly check from the SSA to account for at least half of their monthly income. Without Social Security, millions of seniors would be living below the poverty level.
Unfortunately, this critical program is in deep trouble, and both lawmakers and the public have known it for quite some time. Major demographic changes are poised to turn Social Security on its head within the next two decades. These changes include the mass retirement of baby boomers, which is set to drive the worker-to-beneficiary ratio lower; Americans' growing life expectancies, which allow seniors to draw a payment for a longer period of time; and growing income equality, which means the wealthiest Americans have easier access to medical care and thus live to collect their larger benefit checks for years more.
Social Security's scariest charts
Just how bad could things get for Social Security? It's all spelled out in what could arguably be described as the scariest Social Security charts in the latest Board of Trustees report.
As you can see in the first chart below, the Board of Trustees is projecting that the program can continue to pay out benefits at current levels (including annual cost-of-living adjustments) through the year 2034. After that point, the program's costs would far exceed its projected revenue. Further, the gap widens as time passes, suggesting that the longer lawmakers wait to act, the more difficult it will be to get Social Security back in the black.
Based on the projections, Social Security would have to cut benefits by 23% across the board in order to keep the program solvent through 2091. Considering that the average retired worker brought home just $1,367.58 in May 2017, per the SSA, we can expect an estimated drop in payout, based on 2017 dollars, to $1,053.04 a month. This is barely above the federal poverty level.
What's more, if Congress fails to act and the program merely motors along for the next 75 years, another 4% cut to 73% of current payouts would be needed by 2091.
This forecast is especially troubling when you consider that that 45% of seniors choose to claim Social Security at the earliest age possible (age 62) and therefore accept a 25% to 30% reduction in their payout (depending on their full retirement age).
But that's far from the only scary prediction from the Board of Trustees. Not only will benefits need to be slashed in 2034 if Congress doesn't take action, but the magnitude of Social Security's cash shortfall is growing as well.
As you'll note in the chart below, Social Security's asset reserves are expected to tip the scales in the next few years at as much as $3 trillion. However, by 2022, as noted in the report, the program will begin paying out more in benefits than it's generating in revenue through the payroll tax, interest earned on its asset reserves, and taxes on benefits. By 2034, these asset reserves will be depleted.
But what's truly worrisome is the projection beyond 2034. According to the chart, the cash shortfall for the program, assuming we stay on the current cost trajectory, is a whopping $12.5 trillion by 2091. That's not chump change, and it's actually $1.2 trillion worse than was projected in the 2016 Trustees Report.
Essentially, Congress can let millions of current and future retirees deal with a benefits cut of up to 23%, or they can find a way to raise $12.5 trillion over the next 75 years. Considering how divided Washington is at the moment, the former scenario looks frighteningly plausible.
A bipartisan approach to fixing Social Security
Ironically, there are solutions aplenty on Capitol Hill. The issue is that both the Democrats and the Republicans have a viable way to fix Social Security, and therefore neither will back down from its stance and meet the other party in the middle. However, a bipartisan approach that combines the two core solutions of both parties would actually be a very strong solution, at least in my opinion.
The Democrats have long favored increasing taxation on the wealthy as a means to close the Social Security shortfall. As of 2017, all earned income between $0.01 and $127,200 is subject to the payroll tax of 12.4%. Most workers only pay half, or 6.2%, while their employer covers the other 6.2%. But the key here is that earned income above $127,200, which about 10% of workers earn each year, is exempt from the payroll tax. Democrats want to reinstitute that tax above, say, $250,000 or $400,000, requiring the rich to pay more into the program. The thinking here is that the wealthy are unlikely to be reliant on Social Security income, so they should therefore pay more. Similarly, this measure has plenty of support from the public, as 90% of workers pay into Social Security with every dollar they earn.
Conversely, Republicans want to fix Social Security by adjusting for Americans' increased longevity. Because we're living longer than ever, and Social Security was only designed to provide income for a few years, not 20-plus years, Republicans have suggested increasing the full retirement age from 67 (for those born after 1960) to perhaps 68, 69, or 70. Doing so would require seniors to wait longer to receive their full retirement benefit, or to accept a steeper benefit reduction if they filed for benefits early. Such a measure wouldn't impact current retirees, but future generations of retirees could receive less from Social Security if they're unwilling to wait until their full retirement age.
A blend of these two strategies would probably be an effective plan, as it would generate more revenue from the well-to-do and encourage future generations of retirees to save more and be less reliant on Social Security come retirement. But can Congress work on a bipartisan level on Social Security? That remains to be seen.
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