The latest snapshot from the Social Security Administration shows what we've known for a very long time: Americans, young and predominantly old, are pretty reliant on Social Security. Each and every month, roughly 62 million people receive a benefit check, with approximately 70% of these recipients being older beneficiaries. Of these retired workers, 62% lean on the program to provide at least half of their monthly income.
Yet for as important as Social Security has been for almost eight decades -- payouts began in 1940 -- America's key social program is about to face its toughest test to date.
Trouble is brewing for America's most important social program
According to the recently released annual report from the Social Security Board of Trustees, the program is set to undergo a major transformation this year. For the first time in more than 35 years, the Trustees are estimating that more will be paid out in benefits than collected in revenue.
Mind you, paying out an estimated $1.7 billion more in benefits than revenue collected isn't a big deal when there's approximately $2.9 trillion in excess cash, which is invested in special-issue bonds and certificates of indebtedness, earning interest. But the bigger issue is that this net cash outflow, with a minor exception in 2019, is expected to grow in size with each passing year. By 2027, $169 billion more could be paid out than is collected, based on the intermediate-cost model.
How have we gotten to this point, you ask? Part of the blame does have to do with changing demographics. The ongoing retirement of baby boomers from the workforce is weighing down the worker-to-beneficiary ratio, and life expectancies have been lengthening on a pretty steady basis over many decades, allowing seniors to pull a benefit from Social Security for an extended period of time.
However, this is a problem that's also the result of growing income inequality, record-low interest rates, and even congressional inaction.
Social Security's survival isn't in question -- but its payout sustainability is
With Social Security's $2.9 trillion in asset reserves expected to dwindle beginning in 2018, the Trustees suggest (again, based on the intermediate-cost model) that this excess cash will be completely gone by 2034.
What does that mean? On one hand, it doesn't mean the end for Social Security. Though having no excess cash would eliminate the interest income that generated $85.1 billion for the program in 2017, the 12.4% payroll tax on earned income above $128,400, as of 2018, provides the bulk of funding (87.7% in 2017), and the taxation of benefits is expected to deliver more in revenue with each passing year. In short, revenue will be collected, and eligible beneficiaries will still get a check. Social Security will be there for you when you retire, so if you're eligible, don't let anyone tell you otherwise.
But the depletion of Social Security's asset reserves does signal the unsustainability of the current payout schedule. Per the Trustees, an across-the-board cut to benefits of up to 21% may be needed to sustain payouts through the year 2092, without any further cuts.
It's not exactly a rosy forecast for those aforementioned 62% of retired workers who lean heavily on the program as a major source of income. But what might even more infuriating is just how long lawmakers on Capitol Hill have known they have a problem on their hands.
Here's how long Congress has known Social Security was in trouble
In most years, the Trustees report publishes the long-range (75-year) actuarial balance and Trust Fund depletion dates in a concise table for readers. It's often buried in the middle of this more-than-260-page report, and can be found on page 166 of the latest one.
|Year||Year of Combined Trust Fund Depletion||Year||Year of Combined Trust Fund Depletion|
As you can see, the Social Security program was in good shape looking forward to the next 75 years very shortly after the Reagan administration passed an extensive overhaul in 1983. This overhaul included a gradual increase to the total payroll tax rate on earned income, and raised the full retirement age over a four-decade period from age 65 to age 67. It also introduced the taxation of benefits, which has transformed into a necessary evil for the program.
But beginning in 1985, and in each and every year since, the Trustees report has alluded to a Trust Fund depletion date in the long-range forecast. Understandably, these are just estimates, and they can change dramatically based on costs. If you're wondering why the depletion date has vacillated so much over the years, it's due to the Trustees taking into account changes in tax law, immigration trends, spending habits, economic growth, longevity, and many more variables. The key takeaway is that Congress has known for no fewer than 33 years that Social Security's payout schedule was in trouble.
Congress' hubris dilemma
How exactly do lawmakers ignore a serious problem for 33 years? The simple answer is that they've allowed hubris to get in the way.
Truth be told, both Democrats and Republicans have a core solution to fix Social Security's estimated $13.2 trillion cash shortfall between 2034 and 2092. Unfortunately, these solutions share nothing in common, and since they both work, neither party has been willing to compromise and find a middle-ground fix.
For instance, Democrats have preferred raising or eliminating the maximum taxable earnings cap (that's the $128,400 limit associated with the payroll tax). Right now, any wage income above $128,400 is exempt from Social Security's payroll tax. Thus, while more than 90% of working Americans pay into the system with every cent they earn, the wealthy are able to sidestep taxation on some, or most, of their earned income. Raising or eliminating this cap could resolve Social Security's cash shortfall through 2092.
As for Republicans, they prefer gradually increasing the full retirement age -- the age where you become eligible to receive your full retirement benefit, as determined by your birth year -- from age 67, which is where it'll cap in 2022 for those born in 1960 or later, to between age 68 and 70. Raising the full retirement age would either require workers to wait longer to receive their full payout, or it would lead to a steeper permanent reduction in their monthly benefit check if they claimed early. Either way, it reduces the long-term expenditures of the program and eliminates the cash shortfall.
Combining these solutions would work well, especially since they're the two most popular solutions, according to public polling. But with partisanship running high on Capitol Hill, it's the retirees who'll suffer the consequences.