The importance of Social Security for our nation's current and future retirees simply can't be overstated enough. Of the nearly 61.8 million people receiving a Social Security benefit check in October, 68.5% (42.29 million) were retired workers. Of these retirees, some 62% will rely on their Social Security check, which averages $1,374.55 a month, for at least half of their monthly income. Slightly more than a third lean on their monthly Social Security stipend for practically all of their income (90% or more). It's an indispensable source of income that lays a foundation for our country's retired workforce.
Social Security's foundation is cracking
Unfortunately, it's also a broken system. The ongoing retirement of baby boomers from the labor force is pushing the worker-to-beneficiary ratio lower, while lengthening life expectancies have allowed seniors to pull a stipend from the program for decades when it was originally crafted to assist the elderly for a couple of years. These factors and a few others have placed Social Security on shaky ground.
According to the Social Security Board of Trustees, which releases a report annually on the current and long-term (75-year) outlook for America's most important social program, the Trust will begin paying out more in benefits than it's generating in revenue by 2022. In 2034, just 12 years later, the $3 trillion in asset reserves held by the Trust will be completely exhausted.
The silver lining in all of this is that Social Security won't go bankrupt. More than 87% of its funding in 2016 came from the payroll tax: a 12.4% tax on earned income between $0.01 and $127,200, as of 2017. This means that as long as Americans continue to work, and Congress doesn't alter how Social Security is funded, there will always be revenue streaming into the program to be disbursed out to eligible beneficiaries.
The downside is that the current payout schedule has been deemed unsustainable by the Board of Trustees. In its estimate, Social Security payouts for existing and future retirees may need to be cut across the board by up to 23% in 2034.
Democrats and Republicans are at opposite ends of the spectrum on how to fix Social Security
Clearly something needs to be done to fix Social Security, but that change has to come from lawmakers in Washington. But as you're likely aware, Democrats and Republicans agree on practically nothing when it comes to Social Security.
For example, Democrats in Washington want to raise additional revenue to bridge the estimated $12.5 trillion budget shortfall in the program through the year 2091. They would do this by increasing or eliminating the maximum taxable earnings cap, which is the aforementioned $127,200 figure.
Right now, any earned income above this level is free and clear of Social Security's payroll tax. The reason there even is a cap is because the Social Security Administration (SSA) caps maximum monthly payouts at full retirement age at $2,687 in 2017. Since there's a cap on what you'll be paid by the SSA, there's also a cap on how much earned income is taxed. Of course, that also means around 90% of workers are hit with the payroll tax on every dollar they earn, while wealthier workers are able to avoid the payroll tax on a portion of their income. Raising this maximum taxable earnings cap, or eliminating it entirely, would require the rich to pay more, and in turn could completely eliminate Social Security's budget shortfall.
On the other hand, Republicans would prefer to gradually raise the full retirement age, or the age at which you become eligible to receive 100% of your retirement benefit, as determined by your birth year. The full retirement age is set to cap at 67 years in 2022, but the GOP would like to increase this to 68, 69, or even 70 years for future retirees. Doing so would take into account increased longevity and require workers to either work longer to attain a full payout, or accept a steeper reduction in benefits by claiming early. This cost-saving measure could save the program enough money over the long run that it, too, could resolve the budget shortfall.
The only thing Democrats and Republicans can agree on with Social Security
Yet, amazingly, there is something that Democrats and Republicans agree on when it comes to Social Security: Neither party likes the current inflationary tether that determines annual cost-of-living adjustments (COLA), the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
Determining Social Security's annual COLA is pretty simple. The average reading from the third quarter of the previous year (July through September) serves as the baseline figure, while the average reading during the third quarter of the current year is the comparison. If the aggregate price for the goods and services as measured across eight major categories increases from one year to the next, beneficiaries get a commensurate percentage raise, rounded to the nearest 0.1%. If prices drop, as they have in three of the past eight years, benefits remain the same from one year to the next.
The reason that Republicans and Democrats dislike the current measure is that it's geared toward the spending habits of working Americans. Yes, quite a few Social Security recipients are of working age, but as noted earlier, 68.5% are retired workers. The spending habits of retirees tend to differ quite a bit from that of working Americans. For instance, medical expenses and housing costs tend to make up a substantially higher percentage of total expenditures for seniors compared to working Americans, who tend to spend more on entertainment, food, transportation, apparel, and education.
Surprise! More disagreement!
But, as you might imagine, just because Democrats and the GOP agree that the CPI-W has got to go, it doesn't mean they agree on what should replace it.
Democrats want to replace the CPI-W with the CPI-E, or Consumer Price Index for the Elderly. This inflationary tether, as the name implies, would only factor in the spending habits of households with persons ages 62 and up. The thinking is that the CPI-E would place greater emphasis on the spending categories that influence seniors the most, such as medical care and housing, resulting in higher annual COLAs. The downside? It would actually drain Social Security's asset reserves a bit quicker.
Republicans would prefer using the Chained CPI, which is in many ways similar to the CPI-W. The difference is that the Chained CPI takes into account what's known as substitution bias. As the price of a good or service rises, substitution bias suggests that consumers will swap out a more expensive good or service for a cheaper one. The CPI-W doesn't take substitution into account. While the Chained CPI does appear to take into account the real-world thinking of consumers, it would also result in smaller annual COLAs as a result. Though it would save the program money over the long run, the purchasing power of Social Security dollars would take a hit.
In other words, even with one area of agreement, Democrats and Republicans are nowhere near finding a middle ground to resolve Social Security's problems.