For more than three decades, the Social Security Board of Trustees has cautioned, via its annual report, that the existing payout schedule for beneficiaries isn't sustainable. Now those warnings are becoming a reality.
Social Security's judgment day is inching closer
According to the newest annual report, released in early June, Social Security is slated to undergo an unwelcome shift in 2018. For the first time in 36 years, the program is estimated to expend more than it collects in revenue. Even though we're not talking about a relatively large net cash outflow, the mere fact that money will be flowing out of the program after three and a half decades of annual surpluses is a big deal.
Looking even farther down the road, the Trustees opine that a number of ongoing demographic changes will multiply this net cash outflow many times over in 2020 and beyond. By 2034, Social Security is projected to completely exhaust its $2.89 trillion in asset reserves, at which time an across-the-board cut to benefits of up to 21% may be needed to sustain payouts (without any further reductions) through 2092. It's not a very rosy outlook, given just how many seniors are currently reliant on Social Security as a primary income source.
Although no agreement has been reached on how to resolve Social Security's estimated $13.2 trillion cash shortfall between 2034 and 2092, there are absolutely no shortage of proposals on Capitol Hill. What it essentially boils down to is whether additional revenue should be raised, expenditure cuts should be made, or some combination of the two should be enacted.
Should taxes be raised to fix Social Security? The surprising answer
Generally speaking, most surveys would suggest that raising additional revenue via taxation is preferred. Back in 2014, an informal poll from the Washington Post found that approximately 7 out of 10 online participants favored the idea of increasing the maximum taxable earnings cap associated with the payroll tax. In 2018, more than 9 out of 10 workers will earn less than the $128,400 taxable cap, meaning they'll be paying into the program on every dollar they earn. Meanwhile, the fewer than 10% of workers earning over this amount will have every earned dollar beyond $128,400 exempted from the payroll tax. Increasing or eliminating this cap would raise plenty of new revenue from the rich, and it would only impact a small percentage of the population.
But what if fixing Social Security and raising additional revenue meant accepting an across-the-board payroll tax hike for all workers, with the payroll tax cap left unchanged? Earlier in the month, FedSmith.com, a digital news source for current and former federal employees, asked 539 U.S. adults the following yes or no question:
"Would you be willing to have your taxes increased in order to extend full benefits in Social Security beyond 2034?"
Overall, 52% said yes compared with 48% who replied no. But the real story was the bifurcation in the responses based on age. Below are the percentages of "yes" responses according to age:
- Under 35: 23%
- 35-45 years old: 44%
- 45-55 years old: 50%
- 55-65 years old: 56%
- Retired: 70%
Why the very visible gap in support between older and younger Americans?
Well, for starters, young workers are expected to spend three to five more decades in the labor force, meaning they'll be required to fork over more of their earned income for a longer period of time. As you age, you'll spend less time in the workforce, and therefore have less responsibility for supporting the current payout schedule. This is why support among retired Americans is so strong.
The other factor at work here is younger workers probably aren't directly benefiting from Social Security, and therefore don't understand how important it could be. Even though Social Security covers an estimated 175 million workers with disability insurance protection and/or survivors insurance, younger workers are unlikely to realize these tangible benefits exist, and therefore be less receptive to a hike in the payroll tax to fix Social Security's cash shortfall.
The bigger consideration here is that an increase to the payroll tax in any form is highly unlikely unless we were to see a supermajority (i.e., 60 seats) by either party in the Senate, or bipartisan cooperation. Right now, Democrats and Republicans are at complete opposite ends of the spectrum on how to best fix Social Security, and it's been four decades since either party possessed a supermajority in the Senate that would be capable of streamlining an amendment to Social Security.
Even with surveys providing us glimpses of what the American public wants, any chance of a resolution is still a long ways off.