Every month, roughly 62.5 million people, most of them senior citizens, receive a Social Security benefit check. Better than three out of five of its aged beneficiaries rely on the program for at least half of their monthly income.
As we look into the past and examine the present, it's pretty easy to forecast how the program will perform, as well as how much seniors can expect to receive, on average. But the question on working Americans' minds is this: What will happen to Social Security many years down the road, when either they, their children, or even their grandchildren reach the eligible age to draw a retired worker benefit?
While virtually nothing is set in stone, here's a crystal-ball glimpse into what Social Security may look like 50 years from now.
The program will exist
I'd give it a 99%-plus chance that Social Security will be around 50 years from now.
First, though, the bad news. The latest Social Security Board of Trustees report has forecast that $1.7 billion more will be paid in benefits than is collected in revenue beginning this year. This net cash outflow is expected to accelerate with each passing year, with the exception of 2019, according to the intermediate-cost model. By 2034, Social Security's $2.9 trillion in asset reserves are expected to be completely gone.
However, the beauty of the program is that it's designed to never go bankrupt. Currently, Social Security has three funding mechanisms: the 12.4% payroll tax, the taxation of benefits, and interest income earned on its asset reserves. Even if the latter, which supplied 8.5% of the nearly $1 trillion in total revenue in 2017, disappears, the payroll tax, which provides the bulk of Social Security's income, and the taxation of benefits will continue to fund the program.
The only way Social Security doesn't survive the next 50 years is if lawmakers in Washington change the way the program is funded, and I don't think that will happen.
The worker-to-beneficiary ratio will be a lot lower
A growing population in the U.S. means two things: more workers and productivity, and a greater number of eligible beneficiaries. With fertility rates having slowed since the baby boomer era, the worker-to-beneficiary ratio would be expected to decline.
Today, there are about 36 beneficiaries receiving a Social Security check to every 100 covered workers -- a ratio of 2.8-to-1. But in 50 years, this figure will increase to about 48 beneficiaries per every 100 covered workers, or 2.1-to-1. As the worker-to-beneficiary ratio falls, it becomes more difficult to sustain the existing payout schedule without raising additional revenue and/or cutting expenditures.
Core funding and payout dynamics may have shifted
When it comes to Social Security, history has shown that lawmakers only work together when there's virtually no time left to fix an issue. With 16 years to go before the program has exhausted its asset reserves, which could lead to an across-the-board cut in benefits of up to 21% if not dealt with, there's still a lot of time for Congress to continue punting the issue.
But if we look 50 years into the future, lawmakers will probably have overhauled the program one or more times. I would offer a guess that any reforms are going to include bipartisan legislation, just as we saw in 1983. Remember, Social Security reforms will require a supermajority of 60 votes in the Senate, and we haven't seen a single party with a supermajority in the Senate in 40 years. That means bipartisan cooperation is a must. And the only way that's going to happen is if core proposals from Democrats and Republicans are reflected in a Social Security bill.
So, what can retirees expect? First off, I believe we'll see some form of payroll tax reform. It's possible the wealthy could be required to pay more into the program, and it's just as reasonable to expect that payroll taxes on all working Americans will rise.
I also expect that cost-cutting measures will be implemented, such as an increase to the full retirement age -- the age at which you become eligible for 100% of your retired worker benefit -- and a possible means test for seniors who make over a certain amount of income each year.
Benefits could struggle to keep pace with inflation
It's really difficult to look 50 years into the future and get an accurate bead on what type of inflation retired workers might encounter over that time, but my suspicion is that Social Security's cost-of-living adjustment (COLA) will still fail to keep up with the actual inflation seniors are facing.
The current measure of inflation, which has been used since COLA was introduced as an indexed measure in the mid-1970s, is the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). As the name says, it measures the spending habits of working-age urban and clerical workers, who, in all likelihood, don't spend nearly as much on housing and medical care as seniors do. These two important categories therefore don't get adequate representation when annual raises are passed along.
In 50 years, if either the Democrats' or Republicans' solution to fix COLA have been implemented, inflation should still be outpacing Social Security's inflationary tether. The Consumer Price Index for the Elderly (CPI-E), favored by Democrats, fails to take into account important medical expenses, such as Part B premium inflation. Meanwhile, the Republicans' Chained CPI, which accounts for substitution bias -- i.e., trading down from one good to a similar good because of cost -- would almost certainly result in lower COLAs and a decline in purchasing power.
In other words, the program would look much different from what it does today, and it may not be providing the same level of benefits in constant-dollar terms, but it'll still be providing benefits in some capacity to eligible recipients during retirement.