Social Security is arguably the most important social program in this country for seniors. That could change if medical care inflation keeps outpacing the national inflation rate in the future, but for now Social Security, and the guaranteed monthly income it provides to nearly 42 million retired workers, is critical to the financial well-being of many. In fact, Social Security accounts for at least half of the monthly income for more than 25 million of those retired workers.
This statistic is what makes its long-term forecast all the more worrisome.
Major cuts to Social Security may be less than two decades away
According to the latest annual report from the Social Security Board of Trustees, major demographic shifts are expected to wreak havoc on Social Security over the next two decades. These demographic shifts include the steady retirement of baby boomers from the workforce, a lengthening of life expectancies over the past couple of decades, and growing income inequality that's allowed the wealthy easy access to medical care, and thusly a longer life expectancy than the poor. This allows the rich to pull a high Social Security check for a long period of time from the program.
According to the Trustees, Social Security will begin paying out more in benefits than it's generating in revenue via the payroll tax, interest income on its asset reserves, and by taxing Social Security benefits, beginning in 2022. The Trust's nearly $3 trillion in asset reserves is estimated to take just 12 years (until 2034) to be completely depleted. By such time, should lawmakers in Washington fail to pass any new Social Security resolutions, benefits may need to be cut for all current and future retirees by as much as 23% to ensure the solvency of the program through the year 2091.
Think about this for a moment: In June, the average retired worker was receiving a check from the Social Security Administration (SSA) for $1,368.67. If this payout were cut by 23% (in 2017 dollars), the average retired worker would instead be netting just $1,053.88 a month, or $12,647 a year. That's less than $1,000 above the federal poverty level. Admittedly, Social Security was never designed to be a primary income source in the first place. The SSA suggests that it's designed to replace about 40% of your working wages in retirement, with low-income folks perhaps a tad higher, and higher-income folks a bit lower than 40%. Nevertheless, a lot of seniors rely on Social Security well beyond the SSA's "recommendation."
The Trustees report implies that two things need to happen: (1) Workers need to be more diligent savers and investors so as to reduce their future reliance on Social Security, and (2) Congress needs to quit the partisanship and get a long-term fix on the table for discussion.
Here's how much Congress' inaction is costing you
Just how bad are things for Social Security at the moment? The Trustees report listed the programs' actuarial deficit at 2.83% over the next 75 years. This "actuarial deficit" is just a fancy way of quantifying how much of an increase we'd need to see in payroll taxes to eliminate the projected $12.5 trillion budgetary shortfall in the program between 2034 and 2091.
Right now, the payroll tax that all working Americans pay into Social Security is 12.4%, albeit there are two caveats to this figure. First, if you're employed by someone else, they cover half of your payroll tax obligation. This means if you're not a business owner or sole proprietor, you're only paying 6.2% of your earned income into Social Security. However, if you are self-employed, you'll owe all 12.4%. The second caveat is that is the payroll tax only covers earned income between $0.01 and $127,200, as of 2017. The reason there's a maximum cap on taxable earnings is because there's also a maximum monthly payout from Social Security ($2,687 in 2017).
With that being said, the Trustees are suggesting in plainer terms that the payroll tax, which currently sits at 12.4%, needs to increase by 2.83% today in order to eliminate the budgetary shortfall expected through 2091. This means a 15.23% tax on the self-employed, and a 7.615% tax on your earned income as opposed to 6.2%, with your employer also seeing an increase on their end. If the average American household is earning about $50,000 a year, we're talking about a nearly $708 increase in taxes paid to Social Security.
Now here's the kicker: The longer Congress waits to fix Social Security, the worse the actuarial deficit will get. With a few exceptions where the deficit levels off for periods of time, the longer Congress waits, the more of a tax increase will be needed to fix the program. The Trustees estimate a 4.48% actuarial deficit by 2091, assuming no new legislation is passed between now and then. That would mean a 2.24% increase in worker payroll taxes, and an overall payroll tax of 16.88% by 2091.
We have solutions aplenty
What might be even more infuriating is that multiple Social Security solutions have been presented on Capitol Hill, many of which would significantly reduce or eliminate the budgetary shortfall. The issue being that since both Democrats and Republicans have plans that work, neither side is willing to back down on their proposals and work with the other party. It's partisanship at its finest – and it's destroying Social Security little by little.
Most Democrats in Congress want to approach a Social Security fix by raising revenue for the program. They suggest doing this by raising or eliminating the aforementioned maximum taxable earnings cap of $127,200. Even though this cap generally increases annually on par with the National Average Wage Index, it still means that about a tenth of the population that earns more than the cap gets a free pass on some of their income. Thus, reinstituting the payroll tax on earned income above $250,000 or $400,000, or eliminating it entirely, would impact only a small percentage of the working population (which is why this solution is so popular among the public) and generate additional revenue.
Republicans want to approach a Social Security solution by adjusting payouts for increased longevity. Their primary proposal involves increasing the increasing the full retirement age, or the age at which you're eligible to receive 100% of your benefits. By 2022, those born in 1960 or after will have a full retirement age of 67 years. Republicans would like to gradually increase this to 68, 69, or 70 years of age to reflect lengthening life expectancies. This would coerce retirees to wait longer to file for benefits, or to accept a larger reduction in their benefits if they choose to claim early.
A middle ground between these plans, or even a combination of these two proposals, is workable, but Congress first has to recognize the seriousness of the problem. Until it does, the best you can do is work hard to save more of your earned income, invest it wisely, and prepare for a future where your Social Security benefits continue to lose purchasing power.