Few programs are leaned on more by Americans during retirement more than Social Security. Data from the Social Security Administration finds that 62% of today's aged beneficiaries rely on the program to supply at least half of their monthly income. Further, an analysis from the Center on Budget and Policy Priorities estimates that more than 15 million of these aged beneficiaries are singlehandedly kept out of poverty as a result of this guaranteed monthly payment.
It's hard to argue against the program's importance with figures like that backing it up.
But the truth of the matter is that Social Security is in very real trouble and it's less than two decades away from what could be a monumental change for current and future retirees. With the understanding that the future isn't written in stone, and using estimates provided by the newly released Social Security Board of Trustees report, let's take a look at what Social Security might look like in 2035 compared to what we're familiar with today.
It'll be considerably more crowded
The first thing we'd probably notice about Social Security in 2035 is that it will cover significantly more people than it does today. Approximately 4 million baby boomers are leaving the workforce and/or becoming eligible for Social Security benefits with each passing year, pumping up the number of beneficiaries, while at the same time driving down the worker-to-beneficiary ratio.
As of 2017, there were 173.6 million covered workers, as well as 61.5 million beneficiaries covered by either the Old-Age and Survivors Trust or Disability Insurance Trust, leading to a worker-to-beneficiary ratio of 2.8-to-1, or 35 beneficiaries per 100 covered workers. By 2035, under the intermediate prediction model in the Trustees report, there are expected to be 189.6 million covered workers and 86.5 million eligible beneficiaries, which works out to a worker-to-beneficiary ratio of 2.2-to-1, or 46 beneficiaries to 100 covered workers. That's a clear strain on the program.
Workers will have to wait a bit longer to receive their full retirement benefit
Next, the dynamics of the claiming process are likely to have changed.
Back in 1983, Congress passed the last major overhaul of Social Security. While it's always possible another major overhaul could be enacted between now and 2035, the current timeline dictates that the full retirement age -- the age where you become eligible to receive 100% of your retirement benefit -- will increase by two months per year until 2022, where it will cap at age 67. Anyone born in or after 1960 will have to wait until age 67 if they hope to receive their full retired worker benefit. For context, the newest eligible retirees this year (those born in 1956) have a full retirement age of 66 years and 4 months.
Social Security's asset reserves are likely exhausted
Perhaps the most worrisome aspect of Social Security's future is the prediction by the Trustees that the program's asset reserves -- i.e., the excess cash that's been built up since the last overhaul in 1983 due to collecting more revenue than is paid out in benefits each year -- will soon be gone.
According to the intermediate-cost model, Social Security will begin paying out more in benefits than it generates in revenue this year, and will do so in each year going forward. With the exception of 2019, this annual net cash outflow is only expected to grow with each passing year, ultimately resulting in the exhaustion of $2.9 trillion in excess cash by the year 2034.
On the bright side, Social Security will continue to live on and pay benefits to eligible beneficiaries. It's in absolutely no danger of going bankrupt.
A substantial, across-the-board cut to benefits may have been enacted
As you might imagine, going from $2.9 trillion in asset reserves to a giant goose egg is bound to have an impact on Social Security. This consistent net cash outflow, which is estimated to begin this year, is an indication that the current payout schedule, inclusive of annual cost-of-living adjustments, isn't sustainable.
The solution, per the report, could be an across-the-board cut in benefits to existing and future retirees of up to 21% by 2034. Mind you, it's not out of the question that Congress enacts new amendments that raise revenue for the program and/or reduce its long-term costs before then, which could completely change this projection. But if history is any indicator, lawmakers will wait until nearly the last possible moment before taking action.
The payroll tax takes on an even bigger role
If the assumption that Social Security's asset reserves will be depleted by 2034 is true, it also means that one of the program's three key sources of funding will be gone: the interest income earned on its excess cash. That'll leave just two sources of revenue.
The substantially smaller of the two sources, the taxation of Social Security benefits, is expected to provide more to the program over time. Since the income thresholds associated with the taxation of Social Security benefits haven't been adjusted for inflation once since 1983, more than half of all beneficiaries owe some degree of federal tax nowadays. By 2035, this figure will likely be even higher.
However, the payroll tax is probably going to do even more heavy lifting by 2035. Already responsible for 87.7% of all income collected as of 2017, the 12.4% payroll tax on wage income of up to $128,400 (as of 2018) could provide well in excess of 90% of the program's revenue each year by the time 2035 rolls around.
The payroll tax is also the key cog that ensures Social Security can't go bankrupt. As long as Americans keep working, the payroll tax will continue collecting revenue for the program to be disbursed to eligible beneficiaries.
The purchasing power of Social Security dollars continues to decline
Finally, one thing that probably won't change over the next 17 years is the precipitous loss of purchasing power for Social Security dollars.
According to a recent analysis by The Senior Citizens League, Social Security dollars have lost 34% of their purchasing power since the year 2000. For seniors, the issue is that the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) doesn't do a very good job of reflecting the medical care and housing inflation they face each year. That's primarily because the CPI-W is geared toward measuring inflation for certain working-age, not retired, Americans.
The end result for seniors is an annual cost-of-living adjustment that underreports the true inflation they're contending with. Since there's no easy fix for Social Security's inflation issue, a continued loss of purchasing power seems likely.
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