When Social Security was signed into law back in 1935, its purpose was to provide a financial foundation for low-income workers during retirement. For many decades, it's done just that. In fact, an analysis from the Center on Budget and Policy Priorities in 2016 found that approximately 22.1 million eligible beneficiaries -- 15.1 million of which are retired workers -- are kept out of poverty solely as a result of receiving guaranteed monthly benefits from Social Security.
Big trouble is on the horizon
But Social Security is also facing problems. The 2017 report from the Social Security Board of Trustees hints at a program in deep trouble. By the Board's projections, Social Security will begin paying out more in benefits than it's collecting in revenue by 2022. Shortly thereafter, in 2034, the Trust's approximately $3 trillion in asset reserves will be wiped away.
This asset reserve exhaustion is often a source of great confusion. While it sounds terrifying, it simply means that the Trust's excess cash will be gone. The 12.4% payroll tax that's responsible for supplying Social Security with the bulk of its revenue will remain in place, generating revenue that can then be disbursed to eligible beneficiaries. In other words, the program isn't going bankrupt anytime soon, or ever, as long as the primary funding mechanism remains the payroll tax.
However, survival and sustainability aren't the same thing. Based on its current trajectory, benefits may need to be cut on an across-the-board basis by up to 23% in 2034 to sustain payouts through 2091. Given that 62% of current retirees lean on Social Security for at least half of their monthly income, these cuts have the potential to be a big problem.
And, just to complicate things even more, the purchasing power of Social Security dollars has been in a steady tailspin since 2000. An analysis from The Senior Citizens League finds that the purchasing power of Social Security dollars has dropped by 30% since 2000. In plainer terms, what $100 in Social Security income used to buy in 2000, now buys about $70 worth of goods and services.
Social Security needs an immediate fix to protect seniors whom the program was designed to serve. Unfortunately, trying to fix this problem exposes a notorious Catch-22 within Social Security.
Social Security's Catch-22 is a no-win situation for seniors
For those unfamiliar, a Catch-22 describes a dilemma where "there is no escape because of mutually conflicting or dependent conditions." In short, it describes a lose-lose scenario, which is exactly what seniors are facing today with Social Security.
As noted, seniors are seeing their purchasing power evaporate as medical and housing inflation handily outpace their annual cost-of-living adjustment, and they could be just 16 years away from having their benefits cut by as much as 23%.
One such solution, often proposed by Democrats in Congress, is to change Social Security's inflationary tether. Right now, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is responsible for determining the annual cost-of-living adjustment, or raise, that Social Security beneficiaries receive each year. But as the name implies, the CPI-W focuses on the expenditures of urban and clerical workers, not of seniors, who happen to be 69% of the program's total beneficiaries. This is why seniors are getting shortchanged and seeing their purchasing power fall.
The fix would involve using a new inflationary tether, the Consumer Price Index for the Elderly (CPI-E). Rather than tracking the spending habits of urban and clerical workers, the CPI-E would measure the expenditures of households with persons aged 62 and over. It should ultimately result in a more accurate measure of the inflation seniors face each year, resulting in a bigger annual increase in benefits.
Now for that aforementioned Social Security Catch-22: If lawmakers were to move forward with a plan to switch the program's inflationary tether to the CPI-E, and this new measure did put more money into the pockets of seniors via higher annual cost-of-living adjustments, it would drain Social Security's asset reserves even faster. Essentially, it would briefly help seniors out, but lead to an even more immediate crisis. By a similar token, should lawmakers do nothing, it provides more time to fix the program before the Trust's asset reserves are exhausted, but it does nothing to help the declining purchasing power that seniors are contending with.
This simply is a no-win situation, at least without generating additional revenue for the program.
Progress is at a standstill
Further complicating matters is the fact that lawmakers can't agree on anything when it comes to Social Security, aside from the fact that neither Democrats nor Republicans particularly care for the CPI-W as a proper measure of inflation.
The true problem is that each party has its own solution that works to fix the Social Security's estimated $12.5 trillion cash shortfall through 2091.
Democrats would prefer to see wealthier individuals pay more. The way they'd go about this is by raising or eliminating the maximum taxable earnings cap associated with the 12.4% payroll tax on earned income. As of 2018, earned income between $0.01 and $128,400 is subject to Social Security's payroll tax, with any earned income above this amount exempt. If Democrats had their way, some or all of this exempted income for wealthier individuals would become taxable, providing the new capital needed to avoid benefit cuts.
On the other hand, the GOP wants to raise the full retirement age, or the age at which a person becomes eligible to receive 100% of their retirement benefit as determined by their birth year. Gradually raising the full retirement age would help account for increased longevity and either coerce people to wait longer to file for benefits or to accept a steeper permanent reduction in their payout if they claim early. Either way, it saves Social Security money over the long run.
Both plans work, yet there's no middle ground to be found for either party. With progress at an absolute standstill on Capitol Hill, it doesn't look as if the program's key issues are going to be resolved anytime soon.
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