Today is a big day for America's most important social program, so I hope you've brought a lot of candles.
Eighty-three years ago, on Aug. 14, 1935, then-President Franklin D. Roosevelt signed the Social Security Act into law. The primary focus of the Social Security Act was to provide a guaranteed monthly benefit, and ergo a financial foundation, to aged workers during retirement. These payouts officially began on Jan. 1, 1940, and they've continued for the past 78 years. As of June, close to 62.5 million people were receiving a monthly benefit check, including 43.1 million retired workers.
Today, according to data from the Social Security Administration, 62% of retired workers lean on their monthly check to provide at least half of their income, with 34% reliant on Social Security for virtually all of their income (90% to 100%). This equates to more than 15 million retired workers being kept above the federal poverty line, per the Center on Budget and Policy Priorities, as a result of this monthly check.
In short, it's an indispensable program today, just as it was when it first began making payments more than 78 years ago.
My gift to current and future Social Security beneficiaries
Of course, birthdays are about more than just candles and cake. That's right, I'm talking about the presents! And I have a doozy for current retirees and the estimated 175 million Americans covered by Social Security.
The Social Security gift that keeps on giving is the fact that this program is in absolutely no danger of going bankrupt, and that it will, despite pervasive misconceptions, be there for you when you retire.
According to the latest report from the Social Security Board of Trustees, the program is expected to hit an inflection point this year. For this first time since 1982, Social Security is expected to pay out more in benefits to its 62.5 million beneficiaries than it collects in revenue. Even though we're only talking about a net cash outflow of $1.7 billion, which is relatively microscopic compared to the $2.9 trillion in excess cash the program has saved up since its last major overhaul in 1983, it's the simple principle that the dynamics of the program are shifting that's worrisome.
The Trustees suggest that this net cash outflow will accelerate rapidly beginning in 2020 and thereafter. By 2034, the program's $2.9 trillion in asset reserves are expected to be completely exhausted. It's this idea of Social Security running out of its excess cash that's spurred so many falsities and misconceptions about the program, and has left close to half of all millennials believing that they won't receive a red cent in retirement benefits when they retire.
Here's why Social Security will pay retirees a benefit, in theory, forever
But here's the thing about Social Security: two of its three funding sources are ongoing and aren't reliant on its excess cash.
Should Social Security's $2.9 trillion in asset reserves disappear, the program would say goodbye to the interest income earned from this cash. In 2017, interest income accounted for $85.1 billion of the $996.6 billion brought in by the program.
However, it would still continue to generate revenue from the 12.4% payroll tax on earned income of up to $128,400 (as of 2018), as well as from the taxation of Social Security benefits.
Social Security's financial rock is its payroll tax, which supplied $873.6 billion in income in 2017. As long as Americans keep working, the payroll tax will ensure that Social Security is well funded. Plus, with the labor force and productivity growing, payroll tax revenue should steadily increase over time.
The only way that the program's future would be put in doubt is if lawmakers were to change its primary funding mechanism. Last year, a Republican lobbyist on Capitol Hill tossed around the idea of shelving the payroll tax in favor of a value-added tax on consumption. However, the idea never received any serious consideration. I find it highly unlikely that either party would shelve Social Security's payroll tax, making this a rock-solid source of funding for generations to come.
Then there's the taxation of Social Security benefits, which can be referred to as the program's "necessary evil." Implemented in 1983, this amendment to the Social Security Act allows the federal government to tax half of the benefits of single beneficiaries whose adjusted gross income (AGI), plus half of their Social Security benefits, tops $25,000. For couples filing jointly, this figure is $32,000. In 1993, a second tier was added that allowed 85% of benefits to be taxed for single filers and couples topping $34,000 and $44,000, respectively. Income from the taxation of benefits is expected to more than double over the next eight years.
In other words, Social Security has been around now for 83 years, and it could easily be around for 83 more, if not much, much longer. And as I'd like to think, the gift of having Social Security provide a benefit during retirement to eligible workers is priceless.