Social Security is our nation's most successful social program, but that doesn't mean it's impervious to problems. As evidenced by the latest report from the Social Security Board of Trustees, the program is less than 16 years from big trouble.
According to the Trustees, Social Security is on track to expend more in 2020 than it generates in revenue for the first time since 1982. This net-cash outflow, while small, will grow exponentially in size with each passing year. By the time 2035 rolls around, the nearly $2.9 trillion in asset reserves that the program has built up since inception -- and which is currently invested in special-issue government bonds -- will be completely exhausted.
Should this excess capital disappear, Social Security wouldn't be bankrupt, but it would be in line to pass along an across-the-board benefit cut of up to 23% to retired workers. Given that retirees are more reliant on Social Security than ever, this isn't a rosy outlook.
How exactly does the most storied social program become such a mess? That answer can be found in some combination of the following seven factors.
1. Boomers are leaving the workforce at a steady pace
Let's be clear: I don't fault a generation of people who we call "baby boomers" for being born. Nevertheless, it's a fact that boomers are beginning to leave the workforce in increasing numbers and, as a result, the worker-to-beneficiary ratio is under pressure (i.e., how many workers are in the labor force divided by the number of Social Security beneficiaries).
As recently as 2018, the worker-to-beneficiary ratio stood at 2.8 to 1. However, by the time 2035 rolls around, it's expected to have fallen to 2.2 to 1. There simply aren't enough new workers entering the labor force and/or not enough earned income being taxed to counteract the departure of boomers from the workforce.
As a reminder, the 12.4% payroll tax on earned income is Social Security's workhorse. It provided $885 billion of the $1 trillion collected in 2018.
2. We're living longer
On one hand, three cheers for increased longevity! As access to medical care and preventative medicine has improved and pharmaceutical companies give us better medicines to treat various diseases, the life expectancy of Americans, as a whole, has risen. When Social Security began making monthly payments in 1940, the average man and woman lived 62 years and 67 years, respectively, from birth. But on a combined basis, the average American is living more than 78 years today. That's great news since it means we get to spend more time with the friends and family we love.
However, it's not such great news for a program that was built on the idea in the mid-1930s that seniors who could no longer provide for themselves would lean on it for a few years. Today, the average 65 year old is expected to live for about 20 more years, and more Americans are making it to 65 nowadays than in previous decades. This increased longevity is a drain on the Social Security program.
3. Income inequality
If you're looking to blame the wealthy for this mess, you do actually have a case.
You see, the aforementioned program workhorse, the 12.4% payroll tax on earned income, is applicable on earnings (wages and salary, but not investment income) of up to $132,900 in 2019. This "cap" usually rises every year in step with the percentage increase in the National Average Wage Index. The exception is when the cost-of-living adjustment is negative, which has happened only three times since 1975.
The problem is this: More than 9 out of 10 workers will earn less than $132,900 in 2019, meaning they're being taxed on every dollar they earn. Meanwhile, the single-digit percentage of workers who'll earn above $132,900 have every dollar beyond this figure exempted. That means millionaires -- or even billionaires like President Trump -- could have most of their income exempted from payroll taxation. The Social Security Administration estimates that $1.2 trillion in earned income escaped taxation in 2016, costing the program nearly $150 billion in lost revenue.
4. Historically low birth rates pose a problem
A fourth point of blame goes to Generation X and millennials -- both generations have contributed to a downtrend in birth rates. According to data from the National Center for Health Statistics via Pew Research Center, the total fertility rate, which measures historical (but hypothetical) lifetime birth rates for women, hit an all-time low in 2018 of 1.73 births per woman. Mind you, this data goes back roughly 70 years, demonstrating just how big of a drop-off we've seen in births.
Why have birth rates declined so much, you wonder? In examining the issue in more detail, The New York Times posited that millennials are postponing marriage longer than previous generations and therefore pushing the timeline of starting a family further down the road. The Times also suggests increased usage and access to contraceptives has reduced unwanted pregnancies.
The point is that if there are fewer births, there will, in due time, be fewer workers to replace those who are retiring. This could lead to another round of pressure on the worker-to-beneficiary ratio.
5. Legal immigration rates have been stagnant or fallen
Immigration may be a hot-button topic in America and it's especially important for Social Security. The program counts on a steady inflow of legal immigration each and every year to bolster its financial foundation. Generally speaking, the Trustees report found that as net legal immigration rises, the program's long-term deficit declines.
The reason legal immigration to the U.S. is so important is because immigrants tend to be younger. That means they're liable to contribute to the workforce for many decades and thereby pay into Social Security via the payroll tax on their earned income. Younger legal immigrants are also likely to earn themselves a Social Security retired worker benefit when they retire.
The issue is that net legal immigration rates have been stagnant in the intermediate term and have fallen over longer periods of time. As measured in five-year intervals, per data from the St. Louis Federal Reserve, net legal immigration totaled 4.5 million people between 2013 and 2017, which matched the previous five-year stretch. That's down from 5 million people between 2003 and 2007, 5.2 million between 1998 and 2002, and 8.6 million between 1993 and 1997.
6. Dovish Fed policy is hurting the program's interest-earning potential
Not to echo President Trump's sentiments of late, but you can also go ahead and blame the Federal Reserve.
Our nation's central bank is tasked with managing and influencing monetary policy. Through the tools available to the Fed, it can adjust the overnight lending rate between banks, which can have an impact on the interest rates that we pay on revolving accounts, such as credit cards. The Fed has also attempted to influence the economy by purchasing or selling Treasury bonds. The simple point is that the Fed's primary interest is maintaining steady growth and inflation rates, which isn't always easy.
During and following the Great Recession, the Fed lowered its federal funds target rate to a historic low of 0% to 0.25% -- a level it would stay at for seven full years. While great for folks looking for a loan, fixed-income assets suffered.
As noted earlier, Social Security is required by law to invest its nearly $2.9 trillion in asset reserves in special-issue government bonds. The yields on these bonds are tied to actions taken by the Fed. With the Fed remaining exceptionally dovish for years, it led to lower investment income being collected by the Social Security program on the bonds it held.
7. Congressional stalemate
The seventh and final source of blame is Congress. That's right... blame your local and state representatives!
Congress has known since 1985 that Social Security wouldn't generate enough revenue over the long term (defined as the next 75 years in the Trustees report) to continue making full payouts to beneficiaries. Despite this knowledge, Congress hasn't overhauled Social Security in 36 years -- and counting. And the longer Congress waits to act, the more expensive the fix will be on the American workers who foot the bill to keep Social Security going.
An additional kick in the pants is that it's not as if solutions don't exist. Democrats and Republicans each have a core solution that fixes the problem. But since neither party will cede an inch to find common ground, neither has the votes needed to pass their proposal in the Senate.
You may have heard other incorrect information about why Social Security is in big trouble, but these seven reasons fully explain the issues the program is facing.