When the Social Security Act was signed into law in 1935, it was primarily designed to provide a financial foundation for our nation's workers who might otherwise not be able to support themselves during retirement. Since 1940, when payouts began, and through today, the program has done just that. According to an analysis from the Center on Budget and Policy Priorities, it's keeping an estimated 15.1 million present-day retired workers above the federal poverty level.
But change is on the horizon -- and it's not the good kind.
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Breaking down Social Security's problems
A number of ongoing demographic shifts are about to send America's most important social program over the edge. These changes include the ongoing retirement of baby boomers (which is weighing on the worker-to-beneficiary ratio), steadily lengthening life expectancies that have allowed seniors to receive payments for decades rather than a few years, and growing income inequality. This latter trend is an under-the-radar issue that's nonetheless been damaging to Social Security's main purpose of providing a financial foundation to low-income seniors.
The worries about Social Security truly hit home in the latest annual report from the Social Security Board of Trustees, released in early June. The Trustees project that this year will represent the first time since 1982 that the program will pay out more in benefits than it'll collect in revenue.
Though the expected net cash outflow will only work out to an estimated $1.7 billion, the point is that this deficit is expected to accelerate with each passing year, save for a small reprieve in 2019. By 2027, based on the intermediate-cost model, $169 billion more in benefits will be paid out to eligible beneficiaries than is expected to be collected. That's a big problem!
Since 1983, when the Reagan administration passed the last major overhaul of Social Security, some $2.9 trillion in excess cash has been built up by the program. This excess cash has been invested in special-issue bonds that provide a third source of income beyond just the 12.4% payroll tax on earned income and the taxation of benefits. But even with three sources of income, Social Security is headed toward disaster. Per the Trustees report, this $2.9 trillion in excess cash is expected to be completely gone by 2034.
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What exactly does that mean? On one hand, it doesn't mean insolvency. It's not as if Social Security won't have revenue flowing in. The payroll tax on wage income and the taxation of benefits will continue to provide revenue that can be disbursed to eligible beneficiaries. So to debunk a long-running myth -- no, Social Security isn't going bankrupt.
But what this cash depletion does signify is that the current payout schedule isn't sustainable. In order for it to be sustainable over the long term (defined as the next 75 years by the Trustees), the report implies that an across-the-board cut to benefits of up to 21% may be needed. Mind you, 62% of retired workers are currently relying on Social Security for at least half of their monthly income, and by 2034 they could be staring down a 21% haircut to their monthly benefit.
Yes, you have every right to be ticked off
The response of many Americans to Social Security's current predicament is anger -- and I don't blame these folks one bit. You have every right to be ticked off by the way Congress has handled Social Security's impending $13.2 trillion cash shortfall through 2092. And if you're not mad about it, you certainly should be.
1. Congress has known about Social Security's problems for more than three decades
To begin with, it's not as if Congress didn't know Social Security was in trouble. Each and every year, the Trustees report publishes a table that outlines the projected solvency or asset reserve depletion date of the program. And in each and every year since 1985, the Trustees have forecast the exhaustion of Social Security's asset reserves by between 2029 and 2050.
The wide variance simply depends on the year of the report. As it stands now, the program is expected to have exhausted its excess cash by 2034. Lawmakers have known for 33 years that Social Security was in trouble, yet it's been 35 years since any significant overhaul of the program has been undertaken.
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2. The longer Congress waits to act, the more painful the fix becomes
Secondly, the annually released Trustees reports are very clear with one point: the longer lawmakers wait to act, the more painful the fix is going to be. The Trustees represent the expected cash shortage Social Security will face as the "actuarial deficit." The actuarial deficit is nothing more than the estimated increase needed to the existing payroll tax rate today to resolve the program's deficit over the next 75 years.
In 2018, it crept one basis point higher, to 2.84%, implying the need for a payroll tax of 15.24% (the existing 12.4% plus the estimated 2.84%) on earned income to fix the program's long-term shortfall. However, the longer Congress waits to act, the higher the actuarial deficit climbs.
3. Lawmakers have a history of waiting until the 11th hour to fix Social Security
Third, Congress has a history of waiting to the last minute to fix Social Security. Though the Reagan administration is occasionally hailed as saving Social Security in 1983 by passing a bipartisan overhaul of the program, what's often overlooked is that lawmakers effectively had no choice but to pass legislation. There had been a consistent decline in Social Security's 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 -- since 1970, and a net cash outflow in each year since 1975.
After punting a fix down the road many times, Congress did what it does best: pass legislation at the last possible moment. We're now 33 years into our latest cycle of trouble, and lawmakers are doing the same thing once again.
4. Political hubris is blocking any attempt to implement real fixes
But the fourth and final thing that should make Americans downright angry about Social Security is that there are multiple ways the program could be fixed right now! It's not that no one can figure out how to fix Social Security -- it's that our two political parties simply can't figure out a way to play nice and find a middle-ground solution.
The core proposal from Democrats involves lifting or eliminating the maximum taxable earnings cap associated with the payroll tax. As of 2018, all wage income up to $128,400 is subject to the payroll tax, while any earned income above this amount is exempt. Adjusting this cap higher or removing it entirely would require that the wealthy pay a larger share into the program. It would also completely eliminate the long-term cash shortfall.
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Meanwhile, Republicans favor gradually increasing the full retirement age, or the age at which you become eligible to receive 100% of your payout, as determined by your birth year. It's currently set to peak at age 67 for those born in 1960 or after.
But Republicans would like to see this figure raised to between age 68 and 70. In doing so, workers would have to wait longer to receive their full payouts or they'd be required to accept a steeper permanent reduction to their monthly payout if they claimed early. Either way, it would reduce the long-term expenditures of the program by counteracting increased longevity, and like the Democrats proposal, would completely erase the long-term cash shortfall.
These proposals both work. But 60 votes are needed in the Senate to pass a Social Security amendment, and we haven't seen a supermajority by either party in the Senate for four decades. That means there's a need for bipartisan cooperation, which has been next to impossible to achieve when it comes to Social Security.
So to sum things up, we have a program being purposefully sabotaged by political hubris despite the fact that its problems have been well-known for decades. The longer lawmakers wait to fix it, the more painful that fix will be on working Americans and/or retirees.
And you wonder why the American public is upset?
