By all accounts, Social Security is our nation's most important social program. Approximately 63 million people, mostly retired workers, receive a benefit check each month, of which more than a third are kept out of poverty directly as a result of this monthly payout. In other words, nearly eight decades after the first recurring monthly payout was made, the program is still operating as intended.
Congress has known about Social Security's issues for a long time
However, Social Security is also on the verge of a pretty big transformation, according to the Social Security Board of Trustees. Last June, its annually released report examining the short-term (10-year) and long-term (75-year) outlook for America's most important social program raised more red flags than ever before.
You see, lawmakers have known since 1985 that, based on the Trustees report, the program wouldn't generate enough revenue over the long run to maintain its existing payout schedule, inclusive of cost-of-living adjustments. Of course, the expected date of when Social Security's asset reserves would be depleted has changed 22 times since 1984. Nevertheless, this expected excess cash depletion date is drawing closer, with the 2018 report forecasting the exhaustion of nearly $2.9 trillion in cash by 2034. If this cash disappears, across-the-board benefit cuts of up to 21% may be needed.
But it's not just this expectation that at some point in the future the net cash surpluses that the program had built up annually since inception would be gone that's surprising. Rather, it was the expectation that Social Security would hit its long-feared inflection point in 2018, whereby it expends more than it collects in revenue.
Although the 2019 report from the Trustees won't be out until this coming summer, we do know that this prediction was, thankfully, inaccurate. By a slim margin of $3.2 billion, Social Security's asset reserves rose in 2018. Still, this represents the smallest annual net cash surplus in the program since 1983.
This is probably the year that Social Security hits its unwanted inflection point
It looks as if last year the passage of the Tax Cuts and Jobs Act -- signed into law by President Trump in December 2017 -- may have played a very short-term role in pushing up U.S. economic growth and supercharging payroll tax revenue collection for the program. Quarterly U.S. GDP at one point hit a nearly four-year high, with lower individual and corporate income tax rates expected to lead to reinvestment, hiring, and better wages.
In some respects, we have seen hiring, persistent low unemployment rates, and wage inflation. But the bulk of this initial benefit (i.e., the reduction in income taxes owed) has already been realized by the U.S. economy. That makes it all the more likely that U.S. economic growth will slow and/or normalize in 2019, especially with uncertainties surrounding the U.S.-China trade war and Britain's imminent exit from the European Union. That doesn't bode well for Social Security and its workhorse payroll tax.
Ongoing demographic changes, such as the retirement of baby boomers from the workforce at a quicker pace than new workers can replace them, the progressive lengthening of life expectancies over many decades, and growing income inequality, all suggest that program costs are going to soar at a much faster pace than revenue collection. Social Security's first year of net cash outflow (we haven't seen a net cash outflow in 37 years) will really allow things to sink in with lawmakers and the American public of just how serious the program's problems have become. And that first year of cash outflow looks like it'll come in 2019, barring an exceptionally strong economy.
How do we fix this mess?
The writing is clearly on the wall that Congress needs to address the estimated $13.2 trillion cash shortfall between 2034 and 2092 for Social Security. The issue, though, isn't coming up with solutions. There are no shortage of bills that would mostly or completely erase the program's cash shortfall. Rather, fixing this mess entails both parties coming together and finding a middle-ground solution. But working together isn't exactly a strong point of lawmakers in Washington.
Fixing Social Security essentially boils down to the basics of either raising revenue or reducing expenditures. Democrats prefer the former, while Republicans favor the latter. Democrats want to raise or eliminate the payroll tax cap, thereby requiring the wealthy to pay more into the program. Conversely, the GOP wants the full retirement age raised, which would reduce lifetime payouts to future generations of workers.
To be clear, both of these solutions would work as intended. But the problem is that a single-party solution is unlikely to have enough votes in the Senate to pass. Additionally, a single-party fix still has deficiencies. For example, the Democrats' tax proposal doesn't factor in increasing longevity over time, while the GOP's benefit-reduction model works too slowly to address the program's more immediate cash problems.
In other words, the only way to properly and effectively fix Social Security is going to be for Democrats and Republicans to work together. More revenue is needed to shore up the program in the near term, whereas an increase to the full retirement age over the long run will coerce future generations to save more and promote economic growth. It sounds great on paper, but getting Democrats and Republicans to work together on Social Security reform is easier said than done.
For the sake of the 62% of retired workers currently relying on their payout to account for half of their income, and the 84% of nonretirees who expect to lean on Social Security in some capacity to make ends meet during retirement, we can only hope that lawmakers look past their party lines and do the right thing sooner than later.