Social Security is arguably the greatest social program in this country. Since 1940, it's been paying benefits to retired workers, the disabled, and the survivors of deceased workers, and in many instances it's provided a financial foundation that's kept these folks from falling below the poverty line.
A staggering number of Americans believe Social Security could go bankrupt
Unfortunately, Social Security has also witnessed a number of ongoing demographic shifts that have placed the program on not-so-solid footing. The retirement of an average of more than 10,000 baby boomers a day has pressured the worker-to-beneficiary ratio, and people are living longer than ever. Since 1960, the average life expectancy in the U.S. has increased by about nine years. This combination of a rapid uptick in eligible retirees, and the elderly receiving benefits for an extended period of time, appears set to alter the future of Social Security.
According to the latest annual report from the Social Security Board of Trustees, the program is expected to begin paying out more in benefits than it's generating in revenue beginning in 2022. Between 2022 and 2034, the roughly $3 trillion in asset reserves expected to be held in Social Security's coffers should be completely exhausted.
If you aren't too familiar with how the Social Security program works or how it's funded, this sounds like a doomsday prediction -- and the statistics back up that fear.
A recently released poll from the Nationwide Retirement Institute (NRI), conducted by Harris Poll, found that 78% of non-retirees "worry about the Social Security program running out of funding in my lifetime." Per the July 2016 U.S. Census Bureau estimates, 62% of the population is between ages 18 and 64. Assuming a small percentage of those folks are ages 62 to 64, retired, and claiming Social Security, this means that about 150 million non-retired Americans believe Social Security could go bankrupt during their lifetime.
A high number of recent retirees, and folks who've been retired at least 10 years, also expressed their worry about Social Security running out of funding. The NRI survey shows that 63% of new retirees and 56% of those who'd been retired at least 10 years believed Social Security could be insolvent.
A silver lining in a grim forecast
While Social Security's issues are nothing to make light of, there is a silver lining. Namely, it's that Social Security can't go bankrupt. I repeat: Social Security cannot go bankrupt!
Social Security has three sources of funding: the payroll tax, interest income from its asset reserves, and the taxation of benefits.
The taxation of Social Security benefits (yes, your Social Security benefits are taxable if you earn more than $25,000 annually as an individual, or $32,000 as a joint-filing couple) is a relatively small contributor. Last year, it generated $32.8 billion of the $957.5 billion collected by the program.
Similarly, interest income earned on the Trust's more than $2.9 trillion in asset reserves brought in just $88.2 billion (9.2%) of total revenue last year. Interest income is earned via special issue bonds and certificates of indebtedness.
The big moneymaker for Social Security is the 12.4% payroll tax on earned income between $0.01 and $127,200. Since there's a maximum monthly payout from Social Security, there's also a maximum taxable earnings figure, which in 2017 is $127,200. Roughly one out of 10 workers gets a free pass on a portion of their income because of this cap. Most Americans only pay half (6.2%) of this 12.4%, with their employer covering the other half.
Last year, the payroll tax generated $836.2 billion for the program, or better than 87% of total revenue. The payroll tax isn't going away anytime soon, either, which means working Americans and employers will continue paying into the program for a long time to come. Even though Social Security's asset reserves are expected to be depleted by 2034, it'll still be receiving a good chunk of revenue annually from working Americans via the payroll tax. In other words, the payroll tax ensures that Social Security can't be insolvent.
Thusly, while current payout levels may not be sustainable, future payouts at a potentially lower level should be. The Trustees report estimated that a cut of up to 23% may be needed to curb an expected $12.5 trillion cash shortfall between 2034 and 2091. Though no one is exactly thrilled about the idea of a cut to benefits, a check of some sort in retirement is better than no check at all. Of course, it's also a wake-up call to save more, invest wiser, and rely less on Social Security come retirement.