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3 Surprising Problems With Social Security

By Sean Williams - Dec 6, 2019 at 6:06AM

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Stop blaming baby boomers for being born. There are far bigger problems at work behind the scenes.

There's little question of the role Social Security has played in helping to provide a financial foundation for our nation's retirees for the past eight decades. This is a program that, today, keeps more than 22 million people each month out of poverty and is responsible for providing at least half of the monthly income collected by 62% of retired workers.

But it's also a program that's in some pretty serious trouble, according to the Social Security Board of Trustees. The annually released Board of Trustees report has been cautioning lawmakers since 1985 that there wouldn't be sufficient revenue collected over the next 75 years to cover expenses. In other words, Social Security's asset reserves would be depleted, and a sizable cut in benefits would be needed to sustain payouts. In the latest report, the Trustees have forecast a depletion of Social Security's $2.9 trillion in asset reserves by 2035, leading to the possibility of an up to 23% reduction in retired-worker benefits.

Multiple Social Security cards stacked atop each other and fanned out.

Image source: Getty Images.

There's more than meets the eye when it comes to Social Security

As most readers may be aware, this shift from Social Security being one of the nation's strongest social programs to one that's about to hemorrhage money on an annual basis is often blamed on the retirement of baby boomers. As more boomers leave the workforce, the amount being laid out by Social Security rises, putting more pressure on the program.

However, this doesn't tell the full story of what's really going on behind the scenes and why Social Security is truly in trouble. Here are three surprising reasons America's most storied social program is facing a possible cut to benefits in just 15 years.

A man with a big grin in a suit lying atop a bed of cash.

Image source: Getty Images.

1. The rich are getting richer

One of the more low-key problems with the Social Security program is growing income inequality, which is hurting in two different ways. For starters, Social Security's primary means of generating revenue is through its 12.4% payroll tax on earned income (wages and salary, but not investment income) of between $0.01 and $132,900, as of 2019. Last year, the payroll tax brought in $885 billion of the $1 trillion collected by the program.

Whereas most working Americans pay into Social Security with every dollar they earn -- if they make less than $132,900 a year in wages/salary -- a small percentage of workers earn more than $132,900. For the latter, every dollar above this amount is exempt from the payroll tax. Between 1983 and 2016, the Social Security Administration found that the amount of earned income exempted from the payroll tax practically quadrupled from just north of $300 billion to $1.2 trillion. Put another way, a higher percentage of aggregate income earned by well-to-do workers is escaping the payroll tax.

The second issue with growing income inequality is that the well-to-do don't have the same financial constraints as low- or middle-income workers when it comes to accessing preventative care, medical care, or prescription medicines. This is a roundabout way of saying that, on average, the rich tend to live longer than the lower-income individuals that the program was designed to provide for. Thus, not only are the wealthy collecting a payout for a long period of time, but since they earned more per year throughout their lifetimes, it's also an above-average benefit.

A half-emptied hourglass on a table.

Image source: Getty Images.

2. We're living longer

Sometimes, what's good for the goose isn't always good for the gander.

When the Social Security Act was signed into law in Aug. 1935, the average life expectancy at birth for an American was just shy of 62 years. Today, even though life expectancy at birth has seemed to plateau for the past couple of years, the average American at birth is living 78.6 years. That's an increase of more than 16 years in longevity since the Social Security program was signed into law over 84 years ago. Being able to spend added time with friends and family is great news, but it's really not such a good thing for Social Security, which has struggled to adapt to this change in longevity.

You see, Social Security's full retirement age -- i.e., the age at which a retired worker becomes eligible to receive 100% of their benefit as determined by their birth year -- will have only risen for the 10th time in 85 years in 2020 and will only have increased by an aggregate of two years (from age 65 to 67) by 2022. In other words, a program that was designed in the mid-1930s to provide payouts for perhaps a few years to maybe a decade is now regularly being leaned on by retirees to provide payouts for perhaps two decades or longer. The inability of the full retirement age to keep pace with longevity has become a serious strain on Social Security.

A white crib in the corner of a bedroom with a small brown teddy bear inside.

Image source: Getty Images.

3. Americans are having fewer children

Let's also go ahead and blame millennials. Yeah, you heard me -- blame millennials for weakening Social Security.

When the Social Security Board of Trustees offers its short-term (10-year) and long-term (75-year) outlooks, it takes a number of factors into account that most folks probably don't even realize, such as immigration, death rates, and fertility rates. The latter is especially important, given that Social Security relies heavily on the payroll tax to generate income for the program. In other words, new workers are needed to replace the growing number of folks who are retiring and leaving the labor force.

However, over the past decade, we've seen birth rates fall off a cliff. The National Center for Health Statistics recently reported that there were 59.1 births for every 1,000 women of childbearing age in the U.S. in 2018, marking an all-time low, and a 15% decline since 2007. Everything from economic uncertainty to improved access to contraceptives has been cited for the drop in birth rates among millennials. 

There's a decent chance you haven't even noticed this marked drop in births, since immigration has partially helped to fill in the gap. But if these birth-rate figures become the new norm, it'll negatively impact Social Security going forward by further pressuring the worker-to-beneficiary ratio.

In short, before you go blaming boomers for being born and screwing up Social Security, make sure you give a fair share of the blame to income inequality, increasing longevity, and lower birth rates.

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