Out of all the important social programs in the U.S., none is more important than Social Security. Each month, over 62 million people receive a benefit check, of whom roughly seven out of 10 are retired workers. Of these aged beneficiaries, 62% rely on their monthly payout to account for at least half of their income, according to the Social Security Administration. Put another way, we'd probably be dealing with considerably higher elderly poverty rates right now if not for the existence of Social Security.
Despite its importance, Social Security is facing some serious headwinds
Yet, this savior of a program isn't in the best shape. The latest annual report from the Social Security Board of Trustees points to a major shift set to occur this year. For the first time since 1982, the program will expend more money than it generates in revenue. Although the amount of estimated net cash outflow ($1.7 billion) is relatively small when compared to the $2.89 trillion Social Security has in its assets reserves, the point is that it definitively signals the unsustainability of the current payout schedule. In fact, if the existing payout schedule remains unchanged, the Trustees project that the $2.89 trillion in excess cash will be completely depleted by 2034.
Now, before you go throwing in the towel on Social Security, understand that it can, and will, survive without any excess cash in its coffers. As long as the American public keeps working, the 12.4% payroll tax on earned income (up to $128,400, as of 2018) and the taxation of benefits will ensure that money keeps flowing in for eventual disbursement to eligible beneficiaries.
The downside is that since the payout schedule isn't sustainable, an across-the-board cut to benefits of up to 21% may be in the offing. This benefit reduction (per the Trustees report) assumes that Congress doesn't raise additional revenue or reduce expenditures prior to 2034.
With seniors so dependent on Social Security, this isn't exactly an encouraging forecast.
This damning chart (wrongly) places the blame on boomers
You might be wondering how things got so dire with Social Security in the first place. Though there are actually a number of ongoing demographic changes responsible for this shift, much of the blame tends to get placed on baby boomers.
As the following chart shows, courtesy of the SSA's 2018 Fast Facts & Figures report, newly awarded benefits to retired workers have spiked since the boomer generation began retiring in the late 2000s.
In nominal terms, the average number of retired workers initially claiming Social Security benefits on an annual basis has doubled from 1.5 million in the late 1970s to 3 million in 2017. This is significant because there simply aren't enough new workers entering the labor force to support this mass exodus of boomers from the workforce. Between now and 2035, the worker-to-beneficiary ratio is expected to tumble from 2.8-to-1 to only 2.2-to-1, which represents a statistical strain on the program.
Boomers are a scapegoat for bigger issues
But is Social Security's mess really the fault of baby boomers leaving the workforce? Bluntly, no. Though the chart data doesn't lie, boomers rank very low on the totem pole as to why Social Security is facing major headwinds.
If anyone should be thrown under the bus, it should be Congress for failing to take action for 35 years and counting. Although there have been some minor amendments to the Social Security Act since the program was last overhauled in 1983 -- e.g., the addition of a second tier of benefit taxation in 1993 and the removal of the retirement earnings test for those at or past full retirement age in 2000 -- lawmakers have done virtually nothing to shore up Social Security for current and future retirees.
The biggest issue with the wait-and-see approach from Washington is that the longer Congress waits to act, the more painful the fix will be on American workers. In 2018, the Trustees estimated the 75-year actuarial deficit to be 2.84%. In easy-to-understand terms, this means that in order for the program to continue making payments at current levels without any cuts and have one year of asset reserves left over by 2092 (i.e., a Trust fund ratio of 100%), the 12.4% payroll tax on earned income would need to increase by 2.84% today (12.4% + 2.84% = 15.24%) to make that happen. If Congress keeps waiting, the actuarial deficit increases well into the 3% or even 4% range, making a fix more painful on workers.
Income inequality also deserves a wag of the finger.
When Social Security was signed into law in 1935, it was designed to be a financial failsafe for low-income workers who could no longer generate income. And while the program has done a pretty good job of keeping millions of workers out of poverty, it's also disproportionately favoring the rich as time passes by.
You see, the well-to-do have no financial constraints when it comes to receiving preventative medical care or prescription drugs. That's not always the case with low-income folks, who may not have access to preventative care and/or prescription medicine. As a result, longevity tends to favor the wealthy relative to lower income groups. Since the rich, by definition, earn more annually throughout their life, they're also receiving an above-average benefit check for an extended period of time. That's the opposite of what Social Security was intended to do when it was crafted in the 1930s.
Long story short, there's much more to Social Security's problems than a growing number of boomers receiving a benefit.