Each and every month, more than 62 million people receive Social Security benefits checks. Many of these folks are aged beneficiaries (about 45 million), and of these retirees, an estimated 62% are reliant on the program to provide at least half of their monthly income, according to the Social Security Administration. It goes to show just how important Social Security is to the financial well-being of today's older generation.
But one thing today's retired workers and the approximately 175 million working Americans covered by Social Security have in common is a growing fear about this vital program's future. The newly released annual report from the Social Security Board of Trustees paints worrisome pictures about the program's near-, intermediate-, and long-term outlooks.
Social Security's $13 trillion dilemma
In the near term, Social Security is set to undergo a major shift that'll see the program pay out more in benefits than it's generating in revenue. For those of you keeping track at home, Social Security hasn't paid out more in benefits than it's collected in revenue since 1982. But in 2018, and in each year thereafter (at least until 2034), the program is expected to be cash flow negative.
Over the intermediate term, as alluded above, Social Security's asset reserves will dwindle. Currently sitting at approximately $2.9 trillion, which has been built up over the last 35 years, it's expected to only take 16 years to completely deplete the program's excess cash. Though Social Security will continue to exist and make payments to eligible beneficiaries, even if its asset reserves are completely gone, this steady decline demonstrates how unsustainable the current payout schedule is without an additional infusion of revenue.
Then there's the longer-term issue of what happens once we get past 2034. Having defined its long-term forecast as the next 75 years (i.e., through the year 2092), the Trustees report implies the potential need for an across-the-board cut in benefits of up to 21% if no additional revenue is raised, and/or cost cuts made. In such a scenario, current and future retirees would lose. On a monetary basis, the program is looking at a cash shortfall of an estimated $13.2 trillion between 2034 and 2092.
Recent GOP policies have had mixed results on Social Security's long-term cash shortfall
Yet, here's something interesting worth noting: In the 2017 Trustees report, the long-term cash shortfall was only expected to be $12.5 trillion. In just one year, Social Security's expected cash shortfall has risen by $700 billion. According to the report, the shortfall would have risen by $600 billion year over year if there had been no changes in the Trustees' starting values, assumptions, or the nation's laws. However, approximately $100 billion of this increase (which took the shortfall to $13.2 billion) was the result of some combination of changes in assumptions, as well as the Trustees factoring in newly passed laws and actions based on Republican policies.
In particular, the report cites the assumed end of the Deferred Action for Childhood Arrivals (DACA) program, and the passage of the Tax Cuts and Jobs Act, as having modest impacts on Social Security's short-term forecast, and rather negligible long-term impacts.
The rescission of the DACA program is expected to reduce the number of authorized workers, and therefore cause the amount of payroll tax revenue collected to decline in the short term (the report defines the short term as the next 10 years). However, the absence of these authorized workers also means not having to pay them benefits over the long run. Ultimately, the effect on the 75-year forecast is "a negligible net negative," per the report.
As for the Tax Cuts and Jobs Act, a number of changes will impact Social Security, including the repeal of the individual mandate, reduced tax rates for individuals, and slower tax-bracket indexing vis-a-vis the use of the Chained Consumer Price Index. In the near term, the Tax Cuts and Jobs Act is expected to have a notable net negative impact on Social Security, primarily in the form of reduced collection from the taxation of benefits. However, since the individual tax cuts do sunset after 2025, there's expected to be a reversal, leading to a long-term, but negligible, net positive impact on Social Security.
Both parties are to blame for Social Security's mess
Even though recent GOP policies don't appear to be impacting Social Security's long-term outlook in any meaningfully positive or negative way, there's no denying that the actions of the GOP and Democrats are to blame in perpetuating the program's issues.
How so, you ask? Whether you realize it or not, both Democrats and Republicans have a core fix that would eliminate Social Security's long-term cash shortfall. Democrats have proposed lifting or removing the maximum taxable earnings cap (currently $128,400) on wage income for Social Security's payroll tax, which would require the well-to-do to pay more.
Meanwhile, Republicans want to increase the full retirement age -- the age where you'll receive 100% of your retired worker benefit -- to between ages 68 and 70. In doing so, workers will either wait longer to claim benefits, or accept a steeper permanent reduction to their monthly payout, saving the program money over the long run.
The issue is that both solutions work -- and because they work, neither party has been willing to find common ground with the opposition. The longer this stalemate perpetuates, the larger Social Security's long-term cash shortfall has grown. If we want to point the finger at anyone, let it be lawmakers from both sides of the aisle in Washington who are high on hubris and hurting Social Security's long-range outlook because of it.