Social Security is widely considered to be the most important social program for our nation's retired workers. Each month, as of September 2017, nearly 42.2 million retired workers receives a check averaging about $1,372.

While that may not sound like a lot of money, it equates to at least half the monthly income for 62% of elderly beneficiaries and 90%, or more, of the monthly income for about a third of retirees. Put plainly, millions of retirees would probably be living in poverty without a guaranteed monthly stipend from Social Security.

Social Security just hit a milestone

However, these guaranteed payments add up over time. With baby boomers retiring at an average rate of more than 10,000 persons a day, and the average 65-year-old likely to live 20 more years according to data from the Social Security Administration (SSA), the amount the SSA is paying out annually is rapidly growing.

A Social Security card lumped in with a messy pile of cash.

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While it may not come as a surprise to some folks, recently published monthly data from the U.S. Treasury Department showed that Social Security Administration spending topped the $1 trillion mark for the first time ever in fiscal 2017. The federal government's fiscal year begins on October 1 and ends on September 30 of the following year. Comparatively, the SSA only spent around $600 billion back in 1997. 

Officially, SSA spending totaled $1,000,812,000,000 in 2017. This included $791.1 billion being paid to the retired workers and survivors, $143 billion being divvied out to those with disabilities, and $58.7 billion being parsed out to the Supplemental Security Income program. A few smaller expenses include about $4.5 billion in aggregate payments (i.e., adding the retired worker, survivor, and disability contributions together) to the Railroad Retirement Account, and nearly $6.4 billion in administrative expenses from managing retired worker, survivor, and disability claims and requests. You'll note that the SSA is one of the most cost-efficient federal programs, with expenses as a percentage of collected revenue often at or below 0.7%.

Social Security's spending is about to get out of control

Unfortunately, America's most important retirement program is about to see its spending seriously balloon in the decades to come.

As noted, millions of baby boomers are becoming eligible for benefits each year, and there simply aren't enough new workers to take their places in terms of revenue generation. This, coupled with lengthening life expectancies, is expected to significantly weigh on Social Security.

By 2022, the Social Security Board of Trustees has predicted that the program will begin paying out more in benefits than it's collecting in revenue each year. By 2026, the outlays for the Old-Age, Survivors and Disability Insurance Trust, which for 2017 was $946.1 billion, will have grown to an estimated $1.64 trillion. And by 2034, the nearly $3 trillion in asset reserves held by Social Security are expected to be completely gone. 

An elderly man in deep thought while staring out his window.

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What's this all mean for current and future retirees? Assuming Congress does nothing, the Trustees report suggests that an across-the-board cut in benefits of up to 23% may be needed by 2034 to sustain payments through the year 2091. Keep in mind that because Social Security is predominantly funded by a 12.4% payroll tax on the earned income of working Americans, it can never go bankrupt. As long as people are working, there will be tax revenue collected that can be disbursed by the SSA to eligible beneficiaries. But it doesn't mean that the current payout schedule is sustainable.

In order to stabilize Social Security, lawmakers will need to either raise revenue, cut benefits, or perhaps find a middle ground between the two.

Fixing Social Security 101

Raising revenue is the go-to solution for Democrats on Capitol Hill. In particular, most Democrats suggest either raising, or eliminating, the maximum taxable earnings cap tied to Social Security's 12.4% payroll tax. In 2018, earned income between $0.01 and $128,700 is subject to Social Security's payroll tax, with income above and beyond this amount immune to it. The reason there's a cap in the first place is because Social Security has a maximum monthly payout, which happens to be $2,788 in 2018. It doesn't make much sense to tax $10 million in earned income if the maximum payout at full retirement age is just $2,788 a month. 

However, some would argue that eliminating, or raising, this cap, such that the wealthy pay more, makes sense. Roughly 90% of all Americans are paying into Social Security with every dollar they earn, so having the rich pay more helps level the playing field a bit. It would also be possible to eliminate most, or all, of the $12.5 trillion budget shortfall Social Security is facing between 2034 and 2091 by adjusting the maximum taxable earnings cap.

Three senior citizens holding notebooks and pens as if ready to take notes.

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Another solution, often touted by the Republicans, would be to gradually increase the full retirement age. Your full retirement age is the point at which you become eligible to receive 100% of your benefit, and for all Americans, it falls between ages 65 and 67. Since life expectancies have increased pretty steadily for decades, the GOP argues that adjusting for longevity is a smart thing to do. In other words, make people wait longer to receive 100% of their benefit, or make them accept a steeper permanent reduction in their monthly payout by claiming early. For those unfamiliar with Social Security, benefits grow by roughly 8% per year, beginning at age 62 and ending at age 70.

The downside of this plan is that it cuts benefits for future retirees. Working Americans have shown they're poor savers, so requiring millennials and Generation Z to save more and rely on Social Security less may not end well.

This writer has long believed that a combination of both approaches -- raising the maximum taxable earnings cap and the full retirement age -- is the smart way to go. However, with the partisanship that exists in Washington today, having both parties work together seems like a long shot.

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