Each and every month, almost 62 million people receive a benefit check from Social Security's Old-Age, Survivors, and Disability Insurance Trusts. As you might imagine, many of these folks are retired workers (nearly 42.6 million), 62% of which rely on their guaranteed monthly stipend to account for at least half of their monthly income.
When signed into law in 1935, the Social Security Act was designed to provide a financial foundation for low-income retirees. While it has done exactly that for almost eight decades -- the first payments began in 1940 -- the program is under greater stress now than ever before. The dynamics and demographics of the retired workforce have changed so dramatically over the past eight decades that the program is currently on a collision course with disaster.
Social Security is broken
According to the Social Security Board of Trustees' report released in 2017, the program itself will begin paying out more in benefits than it's collecting in revenue via payroll taxes, interest income on its asset reserves, and through the taxation of benefits, by 2022. Just 12 years later, in 2034, an estimated $3 trillion in asset reserves is forecast to be completely exhausted, at which point benefits may need to be cut by up to 23% across the board to keep Social Security solvent through 2091.
How did things get so bad, you wonder? It's really a confluence of factors.
- Approximately 4 million baby boomers are reaching the eligible retirement age for Social Security each year, and there simply aren't enough new workers entering the labor force to buoy the worker-to-beneficiary ratio.
- Longevity has been on a pretty steady march higher since the Social Security Act was signed into law. Since 1960, the average life expectancy in the U.S. has risen by almost nine years. A program that was crafted with the idea of paying benefits to seniors for a few years is now being relied on, in some instances, to pay benefits for two or three decades.
- Income inequality is a problem, too. The wealthy, who have no financial hurdles in receiving preventative medical care or medical treatment, tend to live notably longer than lower-income folks who may have financial healthcare hurdles. Not only does this mean the rich receive a payment from Social Security for a longer period of time, but they also receive a higher monthly payout, since average annual earnings come into play when determining your monthly payout.
- The Federal Reserve can be blamed as well. Keeping its federal funds target rate at historic lows for seven full years pushed interest rates down and minimized the interest income-earning potential of Social Security's asset reserves.
- And, of course, blame Congress. Democrats and Republicans agree on virtually nothing when it comes to Social Security, other than the fact that it's in trouble and needs to be fixed.
Essentially, the program is staring down a $12.5 trillion cash shortfall between 2034 and 2091, based on the current payout trajectory, and despite the increasing proximity of a "doomsday" for Social Security, no progress is being made on Capitol Hill.
Here's the quick way to fix Social Security
But what if there were an easy way to fix Social Security? Believe it or not, there is.
Within the Trustees report, they outline the estimated 75-year actuarial deficit that would need to be overcome in order to keep payouts at their current levels (assuming normal cost-of-living adjustments): 2.83%.
As of 2018, working Americans pay a 12.4% payroll tax on earned income between $0.01 and $128,400. Of course, it's worth pointing out that if you aren't a business owner and work for someone else, your employer covers half (6.2%) of this obligation, leaving you, the worker, responsible for only 6.2% of your earned income, up to $128,400. This payroll tax accounted for more than 87% of the $957.5 billion collected in 2016 by Social Security.
The Trustees' long-term (75-year) actuarial deficit of 2.83% simply means that the payroll tax would need to increase by 2.83% in order to completely eliminate the projected $12.5 trillion cash shortfall in the program. In essence, a 15.23% total payroll tax (12.4% + 2.83%), leading to a 1.415% increase for you and your employer, or a 2.83% for the self-employed, would fix the problem. For the average household earning $50,000 a year, but not self-employed, their annual payroll tax contribution would rise from $3,100 to $3,807 – an extra $707 a year. For the self-employed earning the same amount, their payroll tax bill would rise by more than $1,400 a year.
The thing about actuarial deficits is that they tend to get worse the longer Congress waits to act. Back in 2016, the Trustees report listed an actuarial deficit of 2.66%. In the years that lie ahead, it's expected to climb well over 3% if no new sources of revenue are created.
We've been here before
Interestingly enough, we've actually been here before with Social Security, albeit the hole Congress had to dig its way out of wasn't nearly as deep the last time. In 1983, the Reagan administration was facing an actuarial deficit of roughly 1%, and it resolved the issue by implementing core principles from both political parties. That's right, folks, actual bipartisan cooperation!
The Amendments of 1983 marks the last sweeping overhaul of the Social Security program. It implemented a gradual increase in payroll tax rates for workers and the self-employed, which is a revenue-raising measure the Democrats pushed for. Meanwhile, it raised the full retirement age -- the age where the Social Security Administration deems you eligible to receive 100% of your payout, as determined by your birth year -- by two years, to age 67, over a four-decade span. Adjusting the program to account for increased longevity is a core GOP proposal.
If Congress could work together to find a middle ground back in 1983, there's no reason it can't do the same today with the program facing a long-term deficit that's nearly three times as large. Both the Democrats' and Republicans' core principals could be used in moderation to shore up the program for future generations of workers.
Democrats suggest raising or removing the maximum taxable earnings cap of $128,400 and exposing more of the wealthy's income to the 12.4% payroll tax, while the GOP has intimated that the full retirement age should be increased to as high as 70, or perhaps indexed to life expectancies in the United States. While both proposals work, their "extremeness" ostracizes the other party, whose votes are needed for passage. Instead, a middle ground needs to be found whereby the wealthy pay an additional tax of a few percent, or the payroll tax is increased gradually over time for all workers, and the full retirement age increases gradually by one or two years. Finding this middle ground that allows more revenue to be collected while also reducing the long-term expenditures of the program is the true key to fixing Social Security.
The question is: How long do we have to wait before we get a group of lawmakers on Capitol Hill that can work with each other? The longer we wait, the costlier the fix gets.