Without fail, 63 million beneficiaries receives a Social Security benefit check every month, and this figure is only set to rise in the decades that lie ahead as baby boomers reach the eligible age for a retired worker benefit. Currently, more than three out of five retired workers rely on their monthly stipend from the program to account for at least half of their income, with more than a third being lifted out of poverty as a direct result of their payout. The program is simply that important to the financial well-being of our country's retired workforce.
But it's also a program facing what could accurately be described as the toughest test of its more than eight-decade existence.
Social Security's nearly $2.89 trillion in asset reserves could soon be gone
Over time, a number of demographic changes have weakened Social Security. For instance, the ongoing retirement of baby boomers, and lower birth rates, threaten to lower the worker-to-beneficiary ratio. In plainer English, there just aren't enough new workers entering the labor force to replace the number of boomers who are retiring.
We've also seen rising levels of income inequality and increased longevity adversely affect Social Security. Designed in the mid-1930s as a program that would provide retired worker benefits for perhaps a few years or up to a decade, the average 65-year-old is now living 20 more years. That's a problem when the full retirement age will have risen by just two years (from 65 to 67) between 1940 and 2022.
What does this all mean for Social Security? According to the June 2018 Social Security Board of Trustees report, it's not good. The trustees intimated at the time that Social Security would begin expending more than it's collecting in 2018, which would represent its first net cash outflow since 1982. Although this forecast proved wrong, thanks to a growth surge courtesy of the Tax Cuts and Jobs Act, the beginning of 2019 has demonstrated a $9 billion net cash outflow from asset reserves, through March.
As time passes, these net cash outflows are expected to increase in size, eventually leading to the complete depletion of the program's nearly $2.89 trillion in asset reserves by 2034. What happens after 2034 is often a source of contentious debate among the public.
Just how long can Social Security survive if it continues along its current path? Let's take a closer look.
How long can Social Security really survive?
As the trustees project in the 2018 report, an across-the-board benefit cut of up to 21% would be needed by 2034 (assuming no additional revenue is raised, or cuts enacted, by Congress) to sustain payouts through 2092. Once 2092 rolled around, another nominal reduction would need to be passed along to then-current and future recipients.
Essentially, this means that while the current payout schedule isn't sustainable without a serious cash infusion, the program itself isn't insolvent. Unlike a business, which goes bankrupt if it doesn't have a steady stream of revenue, Social Security does have two steady sources of cash flow.
The first is the 12.4% payroll tax on earned income. In 2019, all earned income between $0.01 and $132,900 is subject to the payroll tax, with any wages and salary beyond $132,900 exempt. In 2017, the payroll tax brought in $873.6 billion of the $996.6 billion collected that year, demonstrating how vital it is as an income source for the program. The taxable limit (i.e., the $132,900 figure) increases annually, on a percentage basis, with the National Average Wage Index, as long as there's a positive cost-of-living adjustment passed along to beneficiaries.
The second source of recurring revenue is the taxation of Social Security benefits. Signed into law in 1983, and introduced in 1984, the taxation of benefits allows up to half of an individual's benefits to be taxed at ordinary federal rates if their modified adjusted gross income, plus one-half of their benefits, exceeds $25,000 (or $32,000 for a couple filing jointly). In 1993, a second tier was added allowing up to 85% of benefits to be taxed at ordinary federal rates for individuals and couples above $34,000 and $44,000, respectively. In 2017, this tax brought in $37.9 billion, but is expected to generate $561.2 billion, in aggregate, between 2018 and 2027.
In other words, as long as the American public keeps working, and Congress doesn't change how Social Security is funded, there will always be a steady stream of cash flowing into the program for disbursement to eligible beneficiaries. Or, put in another context, Social Security could survive forever if nothing changes.
Survival and sustainability are two separate topics
However, it's important to understand that while Social Security is in zero danger of going bankrupt, a growing number of beneficiaries means that, even with a steady stream of cash flow, there won't be enough money coming in to sustain today's payouts. In effect, benefit cuts would be needed from time to time in order to sustain the cash-flow balance of the program. As long as the funding mechanism doesn't change, your children's grandchildren will receive a Social Security benefit – but it could be much smaller on an inflation-adjusted basis than what you or your parents received.
But this does bring to light the very real need for lawmakers on Capitol Hill to work together to create a solution that strengthens Social Security over the long run. Currently facing a $13.2 trillion cash shortfall between 2034 and 2092 in order to sustain the current level of payouts, lawmakers could choose to raise revenue, cut expenditures, or enact some combination of the two.
Democrats would prefer the former, whereby the earnings cap associated with the payroll tax (the $132,900 figure mentioned earlier) is either increased significantly or removed entirely. This would no longer allow more than $1.2 trillion in earned income to escape taxation, and should generate a boatload of extra payroll tax revenue for the program.
Comparatively, Republicans want to see the full retirement age gradually increased from a peak of 67 in 2022, for those folks born in 1960 or later, to as high as age 70. In doing so, future generations of workers would have to either wait longer to receive their full monthly payout, or accept a steeper reduction to their benefit if claiming early. Either way, it would mean lower lifetime outlays, which would save Social Security money.
Naturally, the better solution is a combination of the two, since each brings something to the table that the other fix lacks. But because Congress is highly partisan at the moment, bipartisan cooperation is pretty much off the table. And without cooperation, it's going to be almost impossible to achieve the 60 votes needed in the Senate to amend Social Security.
So, to sum up: Social Security could be around forever, but it does need some sprucing up from lawmakers to avoid a series of expected benefit cuts in the future.