Right now, more than 62 million people each month receive a Social Security benefit. Of these eligible beneficiaries, more than seven out of 10 are seniors. These retired workers tend to lean pretty heavily on Social Security, with the Social Security Administration finding that 62% rely on the program for at least half their income. It's this financial foundation that Social Security builds for aged beneficiaries, as well as their reliance on the program, that make it arguably the nation's most important social program.
This reliance is also what makes what I'm about to tell you especially worrisome: Social Security is in trouble.
Social Security is undergoing a transformation
According to the newly released Social Security Board of Trustees annual report, 2018 is about to become a transformational year for the program. For the first time since 1982, Social Security is on track to pay out more in benefits than it generates in revenue. Though the $1.7 billion cash outflow isn't particularly large when compared to the program's current asset reserves of $2.9 trillion, it's nonetheless symbolic that Social Security's payout schedule is no longer sustainable.
With the exception of a small retracement next year, where benefits paid will outnumber revenue received by just $200 million, Social Security cash outflow is expected to increase with each passing year. There's no single factor responsible for this shift. Instead, it's a combination of baby boomers leaving the workforce in droves, people living considerably longer than they were decades ago, growing income inequality, and the failure of Congress to act.
The end result, per the report, is that Social Security's asset reserves are expected to be completely depleted by 2034. Mind you, this doesn't mean it'll be out of money. On the contrary, Social Security's 12.4% payroll tax on wage income provides the bulk of revenue for the program, and as long as Americans keep working, it'll continue to collect revenue that can be disbursed to eligible beneficiaries.
Instead, with the program's excess cash gone, the trustees suggest that an across-the-board cut in benefits of up to 21% may become necessary in 2034 to sustain payouts (without any further cuts) through 2092.
Donald Trump's plan to strengthen Social Security isn't doing a whole lot
Working Americans are looking to President Donald Trump, as well as the Republican-led Congress, to fix this mess. After all, with tens of millions of seniors reliant on Social Security each month, a 21% cut in benefits could mean a spike in the elderly poverty rate within the next two decades.
Yet Trump hasn't chosen the direct approach when fixing Social Security. Rather than raising revenue by adjusting the payroll tax or cutting expenditures by increasing the full retirement age -- the age at which you become eligible for 100% of your retired worker benefit, as determined by your birth year -- Trump has said that the best way to tackle Social Security is by strengthening the U.S. economy. Why, you ask? The idea is that if Americans are earning more, they'll also be paying more payroll tax, thereby increasing the revenue the program collects each year.
In December, Congress passed, and Trump signed, the Tax Cuts and Jobs Act. This sweeping tax overhaul lowered the ordinary federal income tax rate for most working Americans and slashed the peak corporate income tax rate to 21%. The purpose of this tax cut, in Trump's eyes, was to supercharge growth in U.S. gross domestic product (GDP) and put more money into the pockets of American workers and their families. Since we're a consumption-driven economy, tax cuts appeared to make sense on paper. And since the tax cuts were designed to boost GDP growth, it bode well for an increase in payroll tax revenue.
However, according to the newest trustees report, the Tax Cuts and Jobs Act's long-term impact on Social Security (i.e., over the next 75 years) is a "negligible net-positive effect." Over the short term (the next 10 years), the "law has a significant net negative effect on the financial status of the OASDI program," per the report. The OASDI is the assumed combination of the Old-Age and Survivors Trust and the Disability Insurance Trust.
In plainer terms, Donald Trump's tax plan designed to spur economic growth isn't expected to have a material impact on Social Security's projected $13.2 trillion cash shortfall, through 2092.
This is a problem only Congress can resolve
Social Security's issues are unlikely to be resolved without direct action -- and that's only liable to come from Congress. The kicker here is that both the Democrats and Republicans have a viable fix for Social Security that would generate additional revenue by taxing the wealthy -- the Democrats' solution -- or by gradually raising the full retirement age to account for increased longevity -- the GOP's fix. Of course, that's the problem. Since both parties' solutions work, neither has been willing to cede an inch or find common ground with the opposing party.
Social Security's outlook is pretty straightforward: It's in trouble, and the longer Congress waits to act, the tougher it'll be to fix. At this point, Trump's indirect policies aren't going to cut it, meaning it's up to Congress to move past political hubris and get to work on a bipartisan solution for America's most important social program.