Social Security is a program that's leaned upon by tens of millions of retired Americans each and every month. The November update from the Social Security Administration shows that almost 42.4 million retired workers were receiving a monthly benefit, and that 62% of these workers were reliant on that monthly stipend to account for at least half of their income. But despite guidance from the SSA that Social Security should only be counted on to replace about 40% of retirees' working wages, it would appear it's being leaned on for much more than that.
This makes what I'm about to tell you particularly worrisome: Social Security is in imminent trouble.
The clock is ticking on Social Security
According to the Social Security Board of Trustees' 2017 report, the program is just a few years away from a major shift. By 2022, for first time in almost four decades, Social Security's Trust is expected to pay out more in benefits than it'll collect in revenue. The reasons for this shift? Look no further than the ongoing retirement of baby boomers, increasing longevity over many decades, and growing income inequality that's allowed the rich to live longer and pull in a higher monthly benefit check than lower-income retirees.
But this is just the beginning of problems for Social Security. By 2034, the Trustees are forecasting that the Trust's $3 trillion in asset reserves will have been completely exhausted. The good news, if there is any to be had here, is that Social Security can't go bankrupt thanks to its payroll tax. As long as Americans keep working and earning income, the payroll tax will continue collecting revenue that can be disbursed to beneficiaries. However, the depletion of the asset reserves would confirm that the current payout schedule is unsustainable, and according to the Trustees may require an across-the-board cut in benefits of up to 23%.
In even easier to understand terms, Social Security needs to raise an estimated $12.5 trillion in revenue between 2034 and 2091 if benefit cuts on current and future retirees are to be avoided -- and the only entity that can make that happen is Congress.
Democrats and Republicans have countless ideas on how to "fix" Social Security
Make no mistake about it: Democrats and Republicans usually have no shortage of ideas on how to fix America's most important social program.
Democrats generally favor two core principles to resolve Social Security's biggest issues: increasing or eliminating the maximum taxable earnings cap associated with the payroll tax, and utilizing the Consumer Price Index for the Elderly (CPI-E) as the programs' inflationary tether.
Currently, workers owe a 12.4% payroll tax to Social Security on earned income between $0.01 and $128,400. This means that around 90% of workers owe tax on every single dollar they earn, while around one in 10 workers who earns above $128,400 is able to avoid Social Security's payroll tax on some of their income. Many Democrats want this practice to end, such that wealthier workers are required to pay more into the system.
Furthermore, by switching to the CPI-E, the spending habits of seniors will take precedence when calculating the inflationary raise that beneficiaries receive most years. The assumption is that it'll result in higher annual cost-of-living adjustments.
On the other hand, Republicans favor reducing long-term expenditures by raising the full retirement age to account for increased longevity and by switching the programs' inflationary tether to the Chained CPI.
Your full retirement age, which is determined by your birth year, is the age where the SSA deems you eligible to receive 100% of your retirement benefit. It'll cap at age 67 by the year 2022. If the GOP has its way, it'll increase the full retirement age to 68, 69, or 70. By doing so, future retirees would either have to wait longer to receive their full payout, thus receiving fewer years of benefit payments in the process, or they'd be accepting a steeper reduction in their monthly payout by claiming early, which would also reduce lifetime payouts.
For the GOP, the Chained CPI takes into account a process known as substitution, whereby consumers will trade down to a cheaper good or service if a preferred one becomes too pricey. Using the Chained CPI as the program's inflationary tether would result in smaller annual cost-of-living adjustments, thusly saving Social Security money over the long run.
An ominous sign?
However, a review of all congressional proposals in the House and Senate that would impact the Trust's solvency led me to an ominous finding: It's been five years since Congress has gone this long without a Social Security proposal being made.
Take a look at the history of congressional proposals affecting the program's solvency for yourself. Usually, every month or every other month a member of Congress develops a proposal to reform Social Security. Now, mind you, it doesn't mean that the proposal necessarily gets very far in either house of Congress, but it brings to attention the urgency of the looming issues with America's most important social program. The last time a proposal was brought to the table was all the way back on Sept. 19, 2017 -- nearly four months ago. That's the longest we've gone without a proposal since a stretch between Sept. 12, 2012, and March 8, 2013.
It's certainly possible that Congress has been tied up with other important issues in the interim, such as tax reform, and crafting a federal spending bill. Then again, a lack of Social Security proposals might also indicate just how divided America's two major parties are. In other words, it's very unlikely that any major Social Security reforms are going to come about without the two parties finding some common ground.
Could a lack of proposals from Congress signal a sense of defeat in passing reforms anytime soon? As much as I hate to say it, it's possible, and it's an ominous sign for the future of the program.
Long story short, if I were a working-age American with 10 or more years to go before reaching the eligibility age to claim benefits, I'd be doing everything possible (saving diligently and investing in the stock market) to reduce my expected reliance on Social Security income during retirement.