According to the December snapshot from the Social Security Administration, 61.9 million people a month are receiving a benefit from the Old-Age, Survivors, and Disability (OASDI) Trust. A majority of these folks --= 42.4 million to be more precise -- are retired workers. Though these retirees are only taking home an average of $1,404 a month, that's more than enough to pull more than 15 million out of poverty, so says an analysis by the Center on Budget and Policy Priorities.
What's more, Social Security is leaned on by 62% of retired workers for at least half of their monthly income. Without this guaranteed stipend, it'd be safe to assume that retirees would be struggling to make ends meet.
Unfortunately, this critical program that provides a financial foundations for tens of millions of retired workers, the disabled, and survivors of deceased workers, is walking on unstable ground. The 2017 report from the Social Security Board of Trustees estimates that the program will begin paying out more in benefits than it's collecting in revenue by 2022. Just 12 years later, in 2034, the roughly $3 trillion in asset reserves that the OASDI Trust is expected to have in 2022 will be completely gone.
How on Earth will America's most crucial social program deplete $3 trillion in a matter of 12 years? Let's take a look.
1. The retirement of baby boomers weighs on the worker-to-beneficiary ratio
To begin with, some, but nowhere near all, of the blame does lie with the baby boomer generation. These folks had no control over when they were born, but the simple fact remains that as they leave the workforce, there aren't enough new workers to take their place. Ultimately, this is expected to push the worker-to-beneficiary ratio from 2.8-to-1 in 2017 to 2.2-to-1 by 2035.
Why's this important, you ask? Social Security is primarily funded by a payroll tax on earned income. In 2016, 87.3% of the $957.5 billion collected by the program was derived from this 12.4% tax on earned income. In 2018, all earned income between $0.01 and $128,400 is subject to this tax, with employers and employees splitting their liability at 6.2% each. If there aren't enough new workers to replace the roughly 4 million boomers leaving the workforce each year, then the collected payroll tax revenue won't be enough to sustain the current payout schedule as the number of eligible Social Security recipients grows.
2. We're living considerably longer than the program was designed for
A second problem is that we're simply living too long. Trust me, it's a problem few of us are complaining about. Unfortunately, Social Security, when first conceived, was never designed to be a supplemental income source for decades.
The average life expectancy, when the Social Security Act was signed into law in 1935, was only around 62 years of age. This meant the typical retiree was likely to receive benefits for only a few years. However, today's life expectancy is nearly 79 years. In fact, the Social Security Administration notes that the average 65-year-old will live a tad over 20 more years. That could mean two or more decades of benefit checks from the OASDI Trust. It was never designed to provide coverage to retirees for such an extended period of time, and it's straining the program.
3. Income inequality is wreaking havoc
To somewhat build on the previous point, income inequality is also responsible for the expected exhaustion of $3 trillion in asset reserves from the OASDI. The issue with income inequality being that the wealthy are living considerably longer than lower-income folks, and thusly pulling in a higher benefit check for a longer period of time. That's putting increased stress on the program.
The gap in longevity between the rich and lower-income stems from the wealthy's ability to receive preventative medical care and treatment, if necessary. Since cost isn't an obstacle for the well-to-do, they're able to receive medical care as often as needed. Comparatively, lower-income workers and families might be shut out of the healthcare system in America due to an inability to pay. This is what allows the rich to collect significantly more from the program over their lifetime.
4. Monetary easing sapped the OASDI's earning potential
Fourthly, the Federal Reserve can somewhat be blamed for helping to sap the earning power of the OASDI Trust.
You see, Social Security's asset reserves, which are currently near $2.9 trillion, are invested in safe, interest-bearing assets. A majority is invested in special issue bonds, with a small amount invested in certificates of indebtedness. The average yield on these assets is around 2.9%. By the time 2022 rolls around and this excess cash starts dwindling, the interest income earned from these bonds and certificates of indebtedness will begin to fall. By 2034, it'll be completely gone.
The Fed kept its federal funds target rate at historic lows for seven years between December 2008 and December 2015 in order to give a boost to the U.S. economy and lending. However, it also negatively impacted bond yields, resulting in a now unimpressive yield on the OASDI's asset reserves.
5. Beneficiaries lack the needed knowledge to make informed decisions
It should also be noted that current and future beneficiaries don't know a lot about Social Security or their claiming options. Back in 2015, a 10-question, true-false, online quiz conducted by MassMutual Financial Group found that just 28% of the 1,513 respondents passed with seven out of 10 correct, or better. A mere one person got all 10 questions correct, and these questions covered fairly basic topics. The takeaway was that most people don't have a good understanding of the program.
Here's the issue: If people don't understand their claiming options, they could either be leaving money on the table, or bogging down the Social Security program. I believe both answers are plausible.
According to the Center for Retirement Research at Boston College, 60% of eligible beneficiaries claim benefits between ages 62 and 64, with 45% claiming at age 62, the earliest age possible. Even though claiming early does result in a permanent reduction in monthly payouts, which you'd think would be beneficial to the Social Security program, the simple fact that folks are rushing to lay claim to their payout as soon as possible rather than waiting a few years is probably straining the OASDI Trust.
6. Congress can't decide on anything when it comes to Social Security
And finally, we can't forget the role that Washington is playing in the matter -- or should I say lack thereof. Despite both Democrats and Republicans acknowledging that Social Security's current path is unsustainable, no major overhaul of the program has been enacted since 1983. The issue is that both parties have a solution that works, and neither will back down to find a middle ground as a result.
Democrats believe in raising or eliminating the payroll tax earnings cap (the aforementioned $128,400 level mentioned earlier). This cap exists because Social Security has a maximum monthly payout of $2,788 at full retirement age in 2018, and it allows wealthier workers earning more than $128,400 annually to avoid Social Security's payroll tax on some or most of their earnings. Upping the cap, or removing it entirely, would require the rich to pay more without impacting the low- and middle-income workers.
Meanwhile, Republicans want to increase the full retirement age from 67 as of 2022 to 68, 69, or even 70 in the years to come. Increasing the full retirement age is a way of accounting for increased longevity. It would require people to wait longer to receive 100% of their full retirement benefit, or to accept a steeper reduction in their monthly payout by claiming early. Either way, the lifetime benefits paid out by Social Security would fall if the retirement age increases.
There's no chance of fixing Social Security if these two parties can't find a middle ground.
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