Social Security is arguably the most important social program in this country, with a majority of retired workers reliant on the program for at least half of their monthly income. It's also in some pretty deep trouble over the long run.

Social Security is undergoing big changes right now

According to the recently released Social Security Board of Trustees report for 2018, a transformation is now underway. Beginning in 2018, and continuing each year thereafter, at least through 2034, the program will pay out more in benefits than it collects in revenue. By 2034, the approximately $2.9 trillion in asset reserves Social Security has built up since its last major reform in 1983 is expected to be depleted. Should this excess cash disappear, and no additional revenue be raised by Congress, the Trustees have estimated that an up to 21% across-the-board cut in benefits for existing and future retirees may be needed in order to sustain payouts without any additional cuts through 2092. 

Two Social Security cards lying atop a fanned pile of cash.

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It's not a pretty outlook by any means, albeit the silver lining is that Social Security is in absolutely no danger of going bankrupt. The 12.4% payroll tax on wage income of up to $128,400, as of 2018, provides the bulk of the funding for the program. As long as Americans keep working, it'll continue to provide valuable income for Social Security that can be disbursed to eligible beneficiaries. Though payouts may fall, eligible retired workers will still receive a benefit.

So, why is this happening, you ask? While no single reason is to blame, it boils down to a confluence of factors. In no particular order, this includes a decline in the worker-to-beneficiary ratio as a result of baby boomers retiring, a steady increase to longevity over many decades, growing income inequality, and Congress' inability to get anything done despite Social Security's many issues.

We've been here before

The real kicker, of course, is that there's no shortage of ways to fix Social Security and address its estimated $13.2 trillion cash shortfall between 2034 and 2092.

Back in 1983, the Reagan administration addressed annual deficits with the Social Security program by passing a bipartisan piece of legislation (the Social Security Amendments of 1983) that tackled the program's problems from both sides of the political aisle.

The Amendments of 1983 are perhaps best known for the creation of the taxation of Social Security benefits, as well as passing along a gradual increase to the full retirement age – i.e., the age where you become eligible to receive 100% of your retirement benefit. 

The taxation of Social Security benefits, which is something of a necessary evil, allowed the federal government to tax up to half of an individual's benefits. If one-half of an individual's Social Security benefits, plus his or her adjusted gross income, surpassed $25,000, his or her Social Security benefits became subject to taxation. For couples filing jointly, this figure was $32,000. The introduction of this tax was designed to raise additional revenue for the program, which is a path most often advocated for by Democrats on Capitol Hill.

A senior man in deep thought, with his hands interlocked in front of his face.

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Meanwhile, the Amendments of 1983 also passed along a gradual increase to the full retirement age. Set at age 65 back in 1983, the full retirement age will cap at age 67 by 2022 for those born in 1960 or later. This increase, which is something Republicans have long advocated for, takes into account increased longevity. It requires retirees to either wait longer to receive their full payout or to accept a steeper reduction in their payout by claiming early. Either way, it saves the program money over the long run.

These changes, along with an increase to the payroll tax on earned income, allowed Social Security to build up its aforementioned $2.9 trillion in asset reserves over the past 35 years.

The important thing everyone overlooks with the Reagan reforms

Much of the discussion today centers around how lawmakers should fix Social Security this time around. Similar to the resolutions in 1983, Democrats are pushing for an increase in tax revenue by lifting or eliminating the maximum taxable earnings cap associated with the payroll tax, while Republicans are angling to raise the full retirement age in order to reduce the program's long-term expenditures.

But the one thing that everyone seems to overlook is how long it took Congress to finally tackle Social Security's issues in 1983. In each and every year between 1975 and 1981, Social Security experienced a net cash outflow – i.e., more benefits were paid to eligible beneficiaries than income collected.

Even more telling, the trust fund ratio -- a measure of Social Security's asset reserves at the end of the year divided by expenditures for that year, expressed as a percentage -- declined every year between 1970 and 1983. The program's trust fund ratio sank from 103% in 1969 and 1970, to just 14% by 1983. 

Sands passing through an hourglass on a table.

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In other words, Congress knew for more than a decade prior to implementing the 1983 Amendments that Social Security was in trouble. The declining trust fund ratio cued them into this fact, and the net cash outflow beginning in 1975 confirmed it. Yet, lawmakers essentially waited until the last possible moment to fix Social Security in 1983.

Had they done nothing, the program would likely have needed to reduce benefits, which is the same outlook today's retirees and working-age Americans are facing by 2034. Though credited with saving Social Security, lawmakers had punted the issue so many times by 1983 that they finally had no choice but to address it.

So, what's the point? Namely that Congress has a history of sweeping Social Security's issues under the rug for fear of upsetting their voting base by passing much-needed, but unpopular, solutions. This suggests that Congress will struggle to resolve Social Security's looming cash shortfall, despite having 16 years to do so, if the Board of Trustees' estimate proves correct.

And, as a reminder, the longer Congress waits to act, the wider the actuarial deficit grows. Or, in plainer English, the longer lawmakers wait to address Social Security's plain-as-day problems, the more painful the fix is going to be on working Americans and retirees once implemented.