Ready or not, Social Security is in trouble.
Our nation's most important social program, which has been providing monthly payouts to seniors for nearly eight decades, stands on the precipice of a major change. Soon, Social Security will begin paying out more on a monthly basis than it's generating in revenue, creating its first net cash outflow since 1982, the year before the Reagan administration enacted the last major overhaul of the program.
Spending more than it's collecting in revenue suggests that Social Security's existing payout schedule isn't sustainable over the long run. Projections from the Social Security Board of Trustees jibe with this assessment, with the Trustees forecasting the complete exhaustion of the program's $2.9 trillion in asset reserves by the year 2034.
To be clear, Social Security running out of its excess cash doesn't make the program insolvent or put it on a path to bankruptcy. Recurring revenue sources, such as its 12.4% payroll tax on earned income and the taxation of Social Security benefits, ensure that money will continue flowing into the program, which in turn can be divvied out to all of its eligible beneficiaries.
But the complete depletion of Social Security's asset reserves would coerce lawmakers to cut benefits across the board by up to 21%. Doing that should ensure that payouts continue without any further need for cuts until 2092.
While it's probably a relief to know that Social Security will be there for you when you retire, it's not such great news that a hefty benefit cut could await you and future generations of workers.
The political party responsible for Social Security's woes is...
How did Social Security get into this situation? Part of the blame goes to ongoing demographic changes, such as the retirement of baby boomers, increased longevity over many decades, growing income inequality, and a recent decline in fertility rates.
However, additional blame can be placed on lawmakers who've yet to tackle Social Security's estimated $13.2 trillion cash shortfall between 2034 and 2092. The particular issue with kicking the can down the road on a fix is that the longer Congress waits, the more painful the fix will be on working Americans.
So which party is to blame for this lack of action? Well, that's a bit of a trick question, because it's the fault of both Republicans and Democrats.
You see, it's not as if solutions don't exist on Capitol Hill to resolve this crisis. Each party has a core fix that would significantly reduce, or possibly even eliminate, the $13.2 trillion cash shortfall that awaits.
Democrats in Washington have proposed increasing or completely removing the maximum earnings tax cap associated with the 12.4% payroll tax. In 2019, all earned income between $0.01 and $132,900 is subject to Social Security's payroll tax, meaning more than 9 out of 10 workers are paying into the system on every dollar they earn. Meanwhile, wage income above this amount is exempt, allowing the well-to-do to avoid taxation on some (or most) of their income. In 2016, an estimated $1.2 trillion in earnings was exempt from the payroll tax, according to the Social Security Administration. Raising or eliminating the cap would help level the playing field, so to speak.
As for Republicans, they prefer gradually increasing the full retirement age -- the age at which you become eligible to receive your full benefit, as determined by your birth year. It's currently set to peak at age 67 in 2022 for those born in 1960 or later, and the GOP would like to see this increased to as high as age 70 for future generations of workers. Doing so would require that future generations of retirees either wait longer to receive their full benefit, or accept a steeper monthly reduction in their payout if claiming early. Either way, it saves the program money over the long run by reducing lifetime benefit payouts.
The issue is that since each party has a viable solution, neither side feels incentivized to work with its opposition. However, passing a Social Security amendment in the Senate will require 60 "yes" votes, and neither party has had a supermajority in four decades. This essentially means that bipartisan cooperation is a must if Social Security is going to be fixed, but neither Democrats nor Republicans have been willing to take that first step to find a middle-ground solution.
Here's why we need both parties to work together
Additionally, while a solution is better than no solution, ultimately we're going to need proposals from Democrats and Republicans if we want to put Social Security on the best footing possible over the long term.
We do need more revenue for Social Security, and economic stimulus packages, such as the Tax Cuts and Jobs Act, won't do enough by themselves to accomplish this. The Democratic proposal to increase the tax cap does make sense, especially with fertility rates on the decline in recent years. Lower fertility rates suggest the slower replacement of retiring workers in the decades to come, and thus a lower worker-to-beneficiary ratio. The only way to counteract this decline is with additional revenue, which an increase in the payroll tax cap would provide.
On the other hand, some folks may not like the sound of reducing lifetime benefits via a gradual increase in the full retirement age, as Republicans have proposed; but it, too, is a necessity. Social Security was designed in the mid-1930s to be a financial foundation over the short or intermediate term. Today, it can be expected to provide a benefit check for 20 or more years for the average retiree. As longevity has increased, the full retirement age has hardly budged. Even with revenue increases proposed by Democrats, solutions that directly address the longevity challenge are needed as well.
Social Security's imminent crisis isn't a Democrat or Republican problem -- it's a two-party problem. Write, tweet, or call your local representative and let them know about it!