In November, nearly 62 million people received a benefits check from the Social Security Administration via the Old Age, Survivors, and Disability Insurance Trust (OASDI). About 42.4 million of these recipients were retired workers. As the number of retirees continues to grow, the importance of this monthly stipend that Social Security provides will as well.
According to the Social Security Administration, 62% of all retired workers count on their Social Security check to provide at least half of their monthly income, with 34% of retired beneficiaries leaning on the program for between 90% and 100% of their total income. Though Social Security was designed as a supplementary income source for lower-income folks during retirement, it's transformed into a nest egg in and of itself over the past couple of decades.
Is Social Security on a path to bankruptcy?
But this source of retirement income is on thin ice, at least according to the latest report from the Social Security Board of Trustees. Per the 2017 Trustees report, the OASDI will begin paying out more in benefits than it's generating in annual revenue by 2022. Just 12 years after that, in 2034, the OASDI is expected to have completely exhausted its $3 trillion in asset reserves.
Why the dilemma for America's most important social program? A number of factors are at play, including the ongoing retirement of roughly 4 million baby boomers a year, a relatively steady lengthening of life expectancies with each successive decade since Social Security came into being, and growing income inequality that's allowed the rich to live substantially longer than low-income folks. Well-to-do retirees usually receive a high monthly payout for an extended amount of time.
These concerns, along with the forecast from the Board of Trustees, have some working Americans convinced that Social Security won't be there for them when they retire. For example, a 2014 survey from Pew Research found that slightly more than half (51%) of all millennials wasn't counting on Social Security income being there during their golden years.
You might be wondering, when exactly will Social Security be bankrupt? Will it be 2034, as the Trustees have forecast, or could it happen even sooner? The answer might shock you.
Surprise! Social Security can (theoretically) last forever
How about never? That's right, never! Social Security, as it's currently designed, is incapable of going bankrupt, which means retired workers, survivors, and the disabled will still receive a monthly stipend from the program, assuming they're eligible.
How is this possible? Look no further than the primary source of funding for the program: payroll taxes.
In 2016, $957.5 billion in revenue was collected for Social Security. Nearly $33 billion of this came from the taxation of Social Security benefits (yes, your benefits may be taxable at the federal level if you earn too much). Another $88.4 billion was generated as interest income from the nearly $2.9 trillion in asset reserves that's currently invested in special issue bonds and certificates of indebtedness. The remainder came from a payroll tax of 12.4% on earned income between $0.01 and $128,400 (as of 2018).
There are a few noteworthy aspects of this payroll tax. First, most working Americans aren't liable for the full 12.4%. If you're employed by someone else, your employer takes care of half of your Social Security payroll tax liability. That means the average working American will hand over 6.2% of their earned income up to $128,400 in 2018. Only folks who are self-employed are liable for the full 12.4% payroll tax.
You'll also note the annual income cap on the tax of $128,400. Though this maximum taxable earnings figure often increases annually as a result of wage inflation, it's put in place to account for the fact that Social Security has a monthly maximum payout at full retirement age. Thus, about one in 10 Americans who earn more than the maximum taxable earnings amount each year get a reprieve from having all of their earned income subject to payroll taxation.
But, the key point here is that as long as Americans keep working, the payroll tax will be collected and used to fund payouts to eligible beneficiaries. Assuming Congress doesn't change the primary funding mechanism of Social Security, it simply can't go bankrupt.
Remember, survival and sustainability are two different things
However, just because Social Security can't go bankrupt, it doesn't mean that the current payout schedule is sustainable. If the OASDI does indeed burn through its asset reserves by 2034, and no new revenue is raised by Congress, the Board of Trustees has suggested that a benefits cut of up to 23% may be needed to sustain payouts through 2091.
Let's be honest, no current or future retiree wants to hear that their benefits could be cut by nearly a quarter after paying into the program for years or decades. Then again, receiving something during your golden years is a whole lot better than getting nothing at all. This might not be much in the way of comfort for the 34% of seniors currently leaning on Social Security for essentially all of their monthly income, but it's probably a sigh of relief for working Americans who now know they'll at least have some income waiting for them from Social Security once they retire.