Each month, more than 62 million people receive a benefit check from the Old-Age, Survivors, and Disability Insurance Trust -- and nearly 43 million of these folks are retired workers. According to the Social Security Administration (SSA), more than three out of five of these retirees are reliant on their monthly check to account for at least half of their income, with around a third leaning on the program for essentially all of their income. Suffice it to say that without Social Security, the elderly poverty rate would be a lot higher than it is today.
America's most important social program is in trouble
But the longer-term future of this crucial program is still very much in doubt, as told in the 2017 report from the Social Security Board of Trustees. A big change is expected in 2022, which is when Social Security will pay out more in benefits than it generates in revenue for the first time in four decades. Though America's most important social program will have squirreled away approximately $3 trillion in excess cash (most of which is invested in special-issue bonds) over these four decades, it's expected to be completely exhausted by 2034.
To set the record straight, "exhausting" or "depleting" Social Security's excess cash isn't a good thing, but it also doesn't mean the program is bankrupt. It simply suggests that the current payout schedule isn't sustainable. Adjusting the payout schedule by reducing benefits on an across-the-board basis by up to 23% would sustain payouts through the year 2091, according to the Trustees, without the need for any additional benefit reductions.
Plus, as long as the 12.4% payroll tax on earned income ranging between $0.01 and $128,400 (as of 2018) remains Social Security's primary funding source, and Americans keep working, there will always be revenue for the SSA to disburse to eligible beneficiaries.
So, how the heck did things go so wrong with Social Security? A lot of finger-pointing gets directed at baby boomers, who are in the process of retiring from the workforce and becoming eligible for Social Security benefits. As this has occurred, the worker-to-beneficiary ratio is being pushed lower.
You'll also see increased longevity referenced as a culprit for Social Security's woes. When signed into law in 1935, Social Security was originally designed to provide benefits to low-income workers for a few years during retirement. Nowadays, the average 65-year-old will live another two decades, allowing them to pull a benefit for an extended period of time. This further strains the program.
Inaction by lawmakers is hurting Social Security
While these are valid ideas behind Social Security's long-term (75-year) cash issues, they overlook the primary culprit responsible for Social Security's downfall: inaction by lawmakers in Washington, D.C.
The last time Congress enacted a major overhaul of the Social Security program was 35 years ago! In 1983, with the program facing a cut in benefits if action wasn't taken, the Reagan administration passed a bipartisan series of amendments that would see the taxation of benefits implemented, payroll taxes increased as a percentage of income, and the full retirement age raised by two years over a four-decade span. But since 1983, very little has been accomplished in Washington with regard to Social Security.
For instance, in 1993, the Clinton administration added a second layer to the taxation of benefits, requiring those individuals and couples who earn more to pay more in tax on their Social Security benefits. In April 2000, lawmakers repealed the retirement earnings test for folks who had reached their full retirement age. But in terms of major changes, it's been 35 years (and counting) since Congress has tackled Social Security.
What does 35 years of relative inaction look like? Let's have a peek:
As you can see from the table above, taken from page 166 of the aforementioned Trustees report in 2017, the actuarial balance has deteriorated from being completely solvent in 1983, the last time Congress passed a major overhaul of Social Security, to currently reading minus-2.83%! This actuarial balance is the Trustees' forecast of how much Social Security's payroll tax would have to increase right now in order to avoid a cut to benefits over the next 75 years.
You'll note that the actuarial balances do vary from year to year as a result of changing economic conditions, adjustments to immigration and longevity, and tax changes. But one aspect that remains relatively constant is that as time passes, the actuarial deficit continues to worsen. Or, in other words, the longer Congress waits to act, the more painful it'll be to fix Social Security in order to avoid cutting benefits on current and future retirees.
The real kick in the pants
Perhaps the greatest injustice of all is that lawmakers aren't without ideas on how to fix Social Security. Both the Democrats and Republicans have a core idea that would completely eliminate the estimated $12.5 trillion cash shortfall between 2034 and 2091.
Democrats would prefer to increase or eliminate the maximum taxable earnings cap associated with Social Security's payroll tax (the aforementioned $128,400 earnings cutoff for 2018). Right now, any wage income above this amount is exempt from Social Security's payroll tax. By raising or eliminating this maximum taxable cap, it would require the wealthy to pay more into the system.
Meanwhile, Republicans would like to increase the full retirement age from a peak of 67, which is set to be hit in 2022, to between ages 68 and 70. Requiring workers to either wait longer to receive 100% of their benefits, or to accept an even steeper discount if they file for benefits prior to hitting their full retirement age would save Social Security money over the long run.
The issue at hand is that political hubris is getting in the way, and neither party can wrangle enough votes to get their idea passed in Congress. With the exception of a supermajority in the Senate (60 seats held by one party), which hasn't happened in roughly four decades, bipartisan cooperation is the only way Social Security is going to get fixed.
The question is, can Democrats and Republicans find any common ground on Social Security? For the sake of your current or future payout, you'd better hope so.