Though you may have heard it said before, it bears repeating: Social Security is our country's most important social program.
Each month, close to 63 million Americans, nearly 70% of which are retired workers, receives a monthly benefit check. Of these retirees, 62% lean on their payout to account for at least half of their income. It's been estimated that if Social Security didn't provide this guaranteed income to eligible aged beneficiaries, the elderly poverty rate would be more than four times higher than it is right now. That's how vital this program is to the financial well-being of our country and our seniors.
A Social Security milestone is on tap for 2019
It's also a program that's about to do something that's never been done in its 83 years of existence (the Social Security Act was signed into law in August 1935). Namely, the Social Security Board of Trustees is forecasting that the program will pay out more than $1 trillion in benefits to its nearly 63 million qualified recipients in 2019.
Mind you, this won't be the first time that the aggregate expenditures of the program have hit $1 trillion. Although approximately 99% of the money collected by the Social Security program is returned to beneficiaries, some of what's collected is used to pay for the administrative fees to run the program (e.g., Social Security employees, building and rent costs, and so on), and transfers to the Railroad Retirement interchange. Estimates for 2018 from the Trustees report called for $1.003 trillion in expenditures for the program, consisting of $6.2 billion in administrative fees, $4.9 billion in Railroad Retirement transfers, and $991.8 billion in scheduled benefits.
In 2019, aggregate expenditures are forecast to increase to $1.062 trillion, with $11.1 billion in combined costs from administrative expenses and the Railroad Retirement interchange. The remaining $1.052 trillion will head to eligible beneficiaries, marking the first time in history more than $1 trillion has been paid out by the program in benefits.
Expenditures will soar in the coming years
However, this won't be the last milestone by any means for Social Security. The ongoing retirement of baby boomers means the number of eligible aged beneficiaries, and therefore the total amount of benefits paid each year, is about to really pick up steam. By 2023, program expenditures are expected to hit $1.36 trillion, then cross $1.5 trillion in 2025, and ultimately hit $1.72 trillion in 2027. That's according to the Trustees' short-term (10 year) forecast, released this past June.
The worrisome news is that collected revenue simply won't be able to keep pace with this rapid rise in costs. Despite relatively small estimated net decreases in the Social Security's asset reserves of $1.7 billion and $0.2 billion in 2018 and 2019, respectively, the program's net cash outflow will grow very quickly in 2020 and beyond. Between 2023 and 2027, expenditures are projected to outweigh revenue by a total of $599 billion.
As you can imagine, this net cash outflow can't go on forever. According to the Trustees report, the entire $2.89 trillion currently held in asset reserves (and invested in special-issue Treasury bonds, as required by law) should be completely exhausted by the year 2034.
To be clear, this doesn't mean bankruptcy or insolvency for the program. Although it would eliminate interest income as a revenue source, the payroll tax and the taxation of benefits would mean that payouts continue indefinitely, so long as the American public keeps working and paying their taxes. But it would mean that the current payout schedule is unsustainable. Per the report, an across-the-board benefit cut of up to 21% may be needed to sustain payouts through 2092. That'd be devastating to seniors who are reliant on Social Security as a major income source.
An equally dubious milestone
Unfortunately, Congress is working on a milestone of its own. Namely, how long can it kick the can down the road without actually doing something meaningful to resolve Social Security's $13.2 trillion cash shortfall between 2034 and 2092.
The last time there was a meaningful change made to the Social Security program that impacted revenue collection and/or expenditures was the Reagan administration's overhaul in 1983. We're heading into our 36th year nearly without anything substantive being done to resolve the coming crisis, despite the fact that lawmakers have known since 1985 that there wasn't enough revenue coming in to meet all expenditures over the long term, which is defined as the next 75 years.
Make no mistake about it, solutions aren't hard to come by in Washington. Both the Democrats and Republicans have a surefire way to resolve Social Security's cash shortfall that, if implemented, would work.
Democrats would like to see the maximum taxable earnings cap associated with the payroll tax raised or eliminated, which would require the well-to-do to pay more into the program without affecting over 90% of the working population. Meanwhile, Republicans have proposed gradually increasing the full retirement age -- the age where you become eligible to receive your full monthly payout, as determined by your birth year -- from age 67 to as high as age 70. We have two proposals from complete opposite ends of the spectrum: One aims to raise revenue, with the other looking to cut long-term expenditures. And since both work, neither party has any incentive to work with their opposition on a middle-ground solution.
Thus, we enter 2019 about to make Social Security history in both amazing and dubious fashion.