For better or worse, Social Security is arguably this country's most important social program. It's currently responsible for providing at least half of the monthly income for roughly 3 out of 5 retired workers, and it's singlehandedly keeping more than 15 million aged beneficiaries out of poverty.
But the foundation for this crucial program is beginning to crumble.
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Social Security is less than two decades away from big trouble
According to the latest report from the Social Security Board of Trustees, the program is just 16 years away from disaster. Beginning this year, and continuing in each subsequent year through 2034, more money is expected to flow out of Social Security than to be collected. Though this net cash outflow will begin relatively small, with just $1.7 billion more in expenditures than revenue in 2018, it's expected to balloon to $169 billion in net cash outflow by 2027.
Things begin to really get dicey once 2034 rolls around. Intermediate-cost estimates from the trustees reveal that the program's $2.9 trillion in asset reserves, which it built up between 1983 and 2017, will have dwindled to $0 by 2034.
If there's a silver lining for seniors among all of these projections, it's that Social Security isn't going anywhere. Even without any excess cash, and therefore no interest income earned from its asset reserves, the program will continue to generate plenty of noninterest income. The 12.4% payroll tax on earned income of up to $128,400 (as of 2018) and the taxation of Social Security benefits ensure that payouts to eligible beneficiaries can continue for a very long time.
The real downside: The depletion of Social Security's excess cash is a sign the program's payout schedule is unsustainable. The trustees believe that a benefits cut of up to 21% may be needed by 2034 to sustain payouts through 2092, without any further cuts. This cut would affect both beneficiaries at the time and future beneficiaries. Keeping in mind the noted reliance by seniors on Social Security, a 21% cut to benefits would be disastrous.
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Congress's thumb-twiddling could cost the American public trillions of dollars
It's very clear from the picture that the trustees have painted that lawmakers on Capitol Hill need to step up and resolve this mess. But in spite of knowing about Social Security's imminent cash shortfall for the past 33 years, Congress has done little more than twiddle its thumbs.
There are two reasons in particular that lawmakers have chosen not to act, despite knowing of Social Security's problems.
To begin with, all Social Security solutions come with drawbacks -- and these drawbacks could cause an elected official to lose his or her seat on Capitol Hill. This is a concern that President Trump discussed in a 2013 speech at the Conservative Political Action Conference.
The other issue is that since the Democrats and Republicans each have a solution that works to completely fix Social Security, neither party feels any incentive to find a middle-ground fix by working with the other party.
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But the longer Congress waits to act, the more painful it'll be on the American public when it does.
An important metric in the annual trustees' report is the long-term (75-year) actuarial deficit. Think of the actuarial deficit as the amount that the payroll tax would need to increase today in order to completely cover the expected cash shortfall between 2018 and 2092, while also leaving enough cash in Social Security's coffers to cover a full year of expenses by the end of 2092.
The longer lawmakers wait to act, the higher this actuarial deficit trends -- and therefore, the more money working Americans and their employers would need to fork over just to right the ship.
Back in 2008, the actuarial deficit over the long term was 1.70%. A decade later, it's 2.84%. And if Congress continues to wait, it's going to climb well past 3%. This would imply the need (depending on whether you're self-employed or working for someone else) for a 1.5%-plus to 3%-plus increase in your payroll tax liability just to fix Social Security's imminent cash shortfall. Ultimately, we're talking about the potential for working Americans and their employers to supply trillions of extra dollars over the long run as a result of congressional inaction.
What makes this even more infuriating is that two solutions to completely resolve the program's estimated $13.2 trillion cash shortfall already exist. Democrats would prefer to lift or eliminate the earnings tax cap associated with Social Security's payroll tax, while Republicans have advocated for gradually increasing the full retirement age. Unfortunately, since neither party can get anywhere close to the 60 votes needed to pass a bill in the Senate without bipartisan cooperation, it's the American public that will suffer the consequences.
