Social Security's Woes May Make Your Golden Years Less Lustrous

Social Security's once-rock-solid foundation is buckling.

Sean Williams
Sean Williams
Feb 16, 2019 at 6:06AM
Investment Planning

Six decades ago, one of the most iconic phrases was born: "the golden years." It was a term coined to describe the advanced years of a person's lifetime and was meant to convey the joy that could be had during those years.

You see, during the 1950s, Social Security provided a financial safety net for those too old to work. But retirement often meant a potentially lonely or secluded lifestyle. The proliferation of the "golden years" phrase, especially through advertisements, was meant to show retired workers that there was still plenty of life to lead after hanging up their work gloves for good. Today, the phrase is essentially synonymous with living the good life during retirement.

A visibly concerned elderly man staring out a window.

Image source: Getty Images.

Your golden years may not be so golden after all

Unfortunately, Social Security in the 1950s and the program we're familiar with today aren't quite the same, and the American dream of enjoying your golden years with your feet up on a beach while sipping a margarita is quickly losing its luster.

Although Social Security is responsible for providing a benefit check to more than 43 million retired workers each month, with over 15 million of these seniors being lifted out of poverty as a result of this payout, two issues could keep retirees from fully enjoying their golden years if they're too reliant on the program.

Social Security's imminent cash crunch

The first problem is that Social Security is contending with a number of ongoing demographic changes that it's ill equipped to deal with. Listed in no particular order:

  • Baby boomers are retiring in greater numbers, which'll weigh on the worker-to-beneficiary ratio.
  • Longevity has increased over a long period of time, allowing beneficiaries to receive a payment for many decades instead of a few.
  • Growing income inequality has seen the rich live substantially longer than the poor and, in turn, receive a larger benefit check for an extended period of time.
  • Lower fertility rates threaten to further pressure the worker-to-beneficiary ratio.
Dice and casino chips lying atop two Social Security cards.

Image source: Getty Images.

All this means one thing: Social Security's string of 36 consecutive years of generating a net cash surplus is nearing an end. Very soon, perhaps in 2019, Social Security will expend more than it collects in revenue for the first time since 1982. When that happens, it'll undoubtedly signal the unsustainability of the existing payout schedule and the growing need for lawmakers in Congress to pass legislation that generates additional revenue and/or reduces long-term expenditures.

According to the 2018 Social Security Board of Trustees report, the program has some leeway with its net cash outflows thanks to the nearly $2.9 trillion it has in its asset reserves. But by 2034, this excess capital is expected to be exhausted. Should lawmakers fail to come to the rescue, it could lead to an estimated 21% reduction in payouts across the board. With 62% of current retirees leaning on Social Security for at least 50% of their monthly income, this is a potentially big problem.

The program's precipitous loss of purchasing power

Now, here's the double whammy. Even if Congress steps up and passes legislation to strengthen Social Security, the ongoing decline of purchasing power associated with Social Security dollars will continue to weaken seniors' pocketbooks.

Since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been the inflationary tether for the program. Like most broad-based inflationary tools, it has a predetermined basket of goods and services it measures that help quantify the inflation that consumers are dealing with.

A clearly worried senior woman resting her crossed arms on the back of a chair, and her head on her forearms.

Image source: Getty Images.

The problem is that the CPI-W focuses on urban and clerical workers, who have very different spending habits than folks who are enjoying their "golden years." Despite 7 out 10 beneficiaries being retired workers, the usage of the CPI-W as the program's inflationary tether means an underweighting of important costs, such as medical care and housing, and an overweighting of less-important expenses, such as education, entertainment, and transportation.

An analysis from The Senior Citizens League found that the purchasing power of Social Security income declined by 34% between January 2000 and January 2018. Put in another context, what $100 in Social Security income used to buy for seniors will now only cover $66 worth of those same goods and services.

Making matters worse, both Democrats and Republicans agree that the CPI-W isn't working as intended, but they are unable to find a middle ground approach on how best to fix the problem. Democrats prefer the Consumer Price Index for the Elderly (CPI-E), which would boost cost-of-living adjustments (COLA) but cost the program extra money each year. As for Republicans, they prefer the Chained CPI, which would result in lower annual COLAs, likely worsening the purchasing-power problem. With 60 votes (i.e., bipartisan support) needed for amendments to the program in the Senate, the problems associated with the CPI-W are liable to remain for many years to come.

Long story short, if you're counting on Social Security to do the heavy lifting during your golden years, you could be in for an unpleasant surprise.