For nearly eight decades, Social Security has buoyed up elderly Americans who might not otherwise be able to provide for themselves. Although the average retired worker benefit is "only" $1,422 a month, or about $17,000 a year, this has proven to be more than enough to singlehandedly keep an estimated 15.3 million aged beneficiaries out of poverty.
However, Social Security isn't as healthy as it might appear on the surface. In fact, the latest annual report from the Trustees suggests that, if nothing is done to resolve the program's projected cash shortfall, benefit cuts could be in the offing.
Yes, benefit cuts are on table
According to the 2018 Social Security Board of Trustees report, America's most important social program is about to undergo a major change -- one it hasn't witnessed in 36 years. Beginning in 2018, and continuing with each subsequent year, Social Security is expected to expend more than it collects in revenue.
How's that possible, you wonder? Look no further than a number of ongoing demographic changes that have adversely impacted Social Security. In no particular order, these include:
- The ongoing retirement of baby boomers, which is leading to a decline in the worker-to-beneficiary ratio.
- Increased longevity, which means retired workers are collecting a benefit check for much longer than their parents or grandparents did.
- Growing income inequality, which has resulted in the wealthy living substantially longer than the poor, and also allowed the rich to cash in on a larger monthly benefit check from Social Security.
- Lower fertility rates among millennials, which could threaten to further lower the worker-to-beneficiary ratio.
- Congressional inaction. The longer Congress waits to act, the more painful a fix will be on working Americans.
With the exception of 2019, Social Security's net cash outflow is forecast to grow each year. By 2034, if no new sources of revenue are found, or expenditure cuts made, the nearly $2.9 trillion currently held in asset reserves is forecast to be completely exhausted. When this excess cash is gone is when benefit cuts would take place.
According to the Trustees, then-current and future generations of beneficiaries are facing a payout reduction of up to 21%. This would almost certainly lead to a major increase in elderly poverty rates.
Two fixes with seemingly no middle ground
The good news is that there are solutions to resolve Social Security's estimated $13.2 trillion cash shortfall.
Democrats on Capitol Hill would prefer to see the maximum taxable earnings cap increased substantially or eliminated entirely in order to raise more revenue for the program. You see, right now all earned income up to $128,400 is subject to Social Security's 12.4% payroll tax. However, any earned income above this dollar amount is exempted. This means that fewer than one in 10 wealthier workers earning above this amount are seeing some, or maybe most, of their earnings exempted from the payroll tax. As of 2016, data from the Social Security Administration found that $1.2 trillion in annual earnings was escaping the payroll tax. Democrats want to stop that from happening, thereby shoring up Social Security with added revenue.
On the other hand, Republican lawmakers want to see the full retirement age gradually increased. Your full retirement age is the age at which you become eligible to receive 100% of your monthly payout, as determined by your birth year. Currently set to peak at age 67 for those born in 1960 or later, Republicans have proposed gradually increasing this to age 70. In doing so, it would require future generations of workers -- current and near-term retirees would see no change -- to either choose to wait longer to receive their full benefit or to claim early and accept an even steeper permanent reduction. Either way, it reduces the lifetime benefits paid to future generations and thereby saves the program money.
Now, here's where things get "interesting." Both of these solutions would work individually to resolve the estimated $13.2 trillion cash shortfall. But since both fixes work, and these approaches come from opposite ends of the spectrum -- i.e., revenue increases versus expenditure cuts -- neither party feels any need to find common ground with their opposition. In other words, Democrats feel they have the best solution to fix Social Security, and so do Republicans.
Taking a one-party approach creates a really big problem on the resolution front. Namely, 60 votes are needed in the Senate to make amendments to the program, and it's been four decades since either party has had a supermajority of 60 or more votes. This means that the only way to pass either resolution is with the assistance of their opposition, which isn't going to happen.
Until lawmakers realize that a bipartisan approach is going to be the only successful fix for Social Security, benefit cuts are most definitely a possibility.