Though this news may come as little surprise to most Americans, the country's most important social program is in some deep trouble.
Social Security, which provides a benefit check to more than 43 million retired workers each month, 62% of whom rely on that payout for at least half of their income, is less than two decades away from completely exhausting its nearly $2.9 trillion in asset reserves. That's according to the newest Social Security Board of Trustees report, released in early June.
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Social Security's dire outlook for aging Americans
Although we'll have to wait until the next report to get the official data, the indication from the 2018 Trustees report was that an unwanted inflection point would be hit. Namely, the program would expend more than it collects in 2018 for the first time since 1982. Though this would only be a small net cash outflow of $1.7 billion, the broader theme here is that the program has hit a point of no return without substantial reform on Capitol Hill. Ongoing demographic changes that include the retirement of baby boomers, increased longevity, and growing income inequality mean Social Security's net cash outflows are going to increase in size in 2020 and beyond. By 2034, this almost $2.9 trillion is forecast to be completely gone.
What does this mean exactly? On the bright side, it does not imply bankruptcy or insolvency. Social Security's two recurring sources of revenue -- the 12.4% payroll tax on earned income and the taxation of benefits -- ensure that it always has money rolling in to be disbursed to eligible beneficiaries.
However, this net cash outflow and eventual depletion of its asset reserves, assuming nothing is done by Congress, suggests that the existing payout schedule isn't sustainable. In order to make it sustainable over the long term, which is defined as the next 75 years, an across-the-board cut to benefits of 21% may be needed. Taking into account just how many aged Americans count on Social Security as their primary income source, you can see how this could become a major problem.
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Democrats and Republicans are nowhere near a fix
The reality of the situation is that the American public is looking to its elected representatives in Washington to fix the problem -- and those officials are miles apart on a solution.
Now, understand, actual solutions aren't the issue. Both the Democrats and Republicans have a workable fix that would resolve the estimated $13.2 trillion cash shortfall facing Social Security between 2034 and 2092. The issue is that since both solutions will work, neither party has any incentive to compromise and find a middle-ground proposal.
Democrats have long favored the idea of increasing or eliminating the earnings cap associated with the payroll tax. In 2019, all earned income between $0.01 and $132,900 is subject to the 12.4% payroll tax, with any earned income above this amount exempt. In 2016, the Social Security Administration estimates that $1.2 trillion in earnings for well-to-do workers was exempted. In a nutshell, this proposal would require higher-earning individuals to pay more into the system, thereby raising revenue and resolving the cash shortfall.
On the other side of the aisle, Republicans have proposed the idea of raising the full retirement age, or the age at which you become eligible to receive your full retirement payout, as determined by your birth year. Currently set to peak at age 67 in 2022 for those born in 1960 or later, the GOP would like to see this gradually increased to as high as age 70 to account for improved longevity. In doing so, it would require that future retirees either wait longer to receive their full benefit or accept a steeper reduction for claiming early. Either way, it results in a reduced lifetime benefit and saves the program money over the long run.
Since 60 votes is required to amend Social Security in the Senate, and neither party has held a supermajority in the Senate in four decades, any change is going to require bipartisan support, which simply hasn't happened.
Speaker of the House Nancy Pelosi speaking from behind a podium. Image source: House of Representatives Speaker.gov website.
Here's a shock: Nancy Pelosi and the GOP once saw eye to eye on Social Security
However, there may be an ever-so-slight shred of hope that something could get done on the Social Security front with Democrats retaking the House and Nancy Pelosi (D-Calif.) being reelected as Speaker of the House.
As you might imagine, Pelosi and Republicans have almost always approached fixing Social Security from opposite ends of the spectrum. Back in the mid-2000s, when then-President George W. Bush was attempting to reform Social Security through a partial privatization of the program, Congresswoman Pelosi vehemently opposed the idea and argued that it would hurt more folks than it would help. Bush's privatization proposal ultimately failed to pass muster in Congress and fizzled out.
But, you might be surprised to learn that Pelosi hasn't always disagreed on a partisan basis with Republicans when it comes to resolving the Social Security crisis. Back in late 2012 and early 2013, Nancy Pelosi noted that she was open to the idea of using the Chained Consumer Price Index (CPI) as the program's primary measure of inflation as opposed to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W has been responsible for calculating Social Security's cost-of-living adjustment, or COLA, since 1975.
The big issue with the CPI-W is that, as the name implies, it measures the spending habits of urban and clerical workers who, almost always, have very different spending habits than aged Americans. This tends to lead to important expenses to seniors, such as housing and medical care, not getting the appropriate level of weighing in COLA calculations. Ultimately, the CPI-W has cost seniors an estimated 34% of their purchasing power since the year 2000.
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Both Democrats and Republicans agree that the CPI-W has to go -- but their proposed replacements are (shocker!) at opposite ends of the spectrum. The Democrats have proposed using the Consumer Price Index for the Elderly (CPI-E), which would only take into account the spending habits of households with persons aged 62 and over -- the idea being that the CPI-E would more accurately reflect the inflation that seniors are facing and lead to higher annual COLAs.
Republicans prefer the Chained CPI. The Chained CPI takes into account the idea of substitution bias. Let's say you're walking down the meat aisle at the grocery store and notice that ground beef prices have risen by 40%. Rather than buy the beef, you opt for pork or chicken instead, because it's cheaper on a per-pound basis. This conscious choice is known as substitution bias -- trading down to a similar good or service when one gets too pricey. The Chained CPI would cause COLAs to grow more slowly, increasing the loss of purchasing power but saving the program a lot of money over the long run.
Once proposed as a conciliatory point by former President Barack Obama as part of a federal deficit-reduction plan, Pelosi noted, "If we can demonstrate that it [Chained CPI] doesn't hurt the poor and the very elderly, then let's take a look at it." In other words, Pelosi saw the Chained CPI, which is already being used as the inflationary tether for federal tax brackets following the passage of the Tax Cuts and Jobs Act, as the lesser evil of numerous GOP deficit-reduction proposals.
As we know, nothing of substance ever came of these bipartisan discussions on Social Security. However, it does leave the door ajar just enough that perhaps Democrats and Republicans can find some wiggle room to develop a bipartisan proposal and improve the outlook for America's most important social program.
