This past Wednesday, Jan. 1, marked the 80th anniversary of the first retired worker payouts from Social Security. Over the past eight decade, we've watched Social Security grow to be the most important social program in the country, with 64 million people receiving a benefit each month. Of these 64 million folks, more than a third are being lifted out of poverty solely because of their guaranteed monthly stipend.
That's what makes what I'm about to tell you all the more difficult. If lawmakers on Capitol Hill don't act relatively soon, Social Security benefits cuts may occur.
Social Security has a cash problem, and benefit cuts may be just 15 years away
How, exactly, does the most storied social program in the U.S. go from solid footing to financial malaise, you wonder? The answer lies with a number of ongoing demographic changes which are, over time, adversely impacted the program.
A lot of people like to point the blame at baby boomers for simply being born. The large uptick in births between 1946 and 1964 will lead to a steady stream of boomers leaving the workforce in the years to come, thereby pressuring the worker-to-beneficiary ratio. But there's far more at work here than simply boomers retiring. In no particular order:
- We're living considerably longer than we were when Social Security payouts began 80 years ago, which means that beneficiaries are able to lean on their payout for decades, rather than years. Social Security was never meant to be relied on for multiple decades.
- Income inequality in the U.S. continues to grow, which negatively impacts payroll tax revenue collection. The 12.4% payroll tax in 2020 applies to all income up to $137,700, meaning all earned income (wages and salary) above this figure will be exempted. Between 1983 and 2016, the amount of income exempted from the payroll tax skyrocketed from a little over $300 billion to $1.2 trillion.
- Birth rates among women of childbearing age have hit an all-time low. Easier access to contraceptives, fewer unplanned pregnancies, and delayed marriages, have all pushed down birth rates, which threatens to further lower the worker-to-beneficiary ratio.
- Net immigration into the U.S. has declined considerably over the past two decades. Social Security relies on a steady stream of legal immigration given that migrants tend to be younger and will spend decades in the labor force, thereby contributing to the program via the payroll tax.
The result, according to the 2019 Social Security Board of Trustees report, is that the program will soon begin expending more money in a given year than it brings in. This hasn't happened since 1982, the year before Congress passed the last major bipartisan overhaul of the Social Security program.
A net-cash outflow, no matter how small, is concrete evidence that the existing payout schedule, inclusive of cost-of-living adjustments, isn't sustainable. Per the Trustees report, by 2035 these net-cash outflows are forecast to have completely wiped out Social Security's nearly $2.9 trillion in asset reserves (i.e., aggregate net-cash surpluses that have been built up over time and are invested in special-issue bonds). When these asset reserves are gone, estimated benefit cuts of up to 23% for then-current and future retired workers would soon follow.
In other words, if Congress doesn't act soon, Social Security benefit cuts are virtually guaranteed.
Political hubris has led to a dangerous (and costly) game of chicken
So, why haven't lawmakers fixed Social Security? A lack of ideas certainly isn't the correct answer. Rather, it's a matter of political hubris. In effect, both political parties have a core fix that makes Social Security stronger, and they therefore don't feel obliged to back down from their solution to meet their opposition in the middle.
Democrats, for instance, want to raise additional revenue from Social Security by increasing or completely eliminating the payroll tax cap (the $137,700 figure where payroll taxation on earnings stops in 2020). In doing so, more than 90% of workers wouldn't feel any impact, while a small percentage of well-to-do workers earning more than $137,700 per year would be required to pay more into the system.
Meanwhile, Republicans want to tackle Social Security's problems by reducing long-term outlays. The GOP would do this by gradually raising the full retirement age -- i.e., the age at which a retired worker becomes eligible for 100% of their monthly payout, as determined by their birth year. Between 1935, when the Social Security Act was signed into law, and 2022, the full retirement age will have gone up by just two years (age 65 to 67), all while life expectancies at birth have risen much faster. By raising the full retirement age, future retirees would have to choose to wait longer to receive their full payout, or accept a steeper permanent reduction by claiming early. Either way, it would reduce a workers' lifetime payout.
What lawmakers don't seem to understand is that there's a flaw to each of their solutions that their opposition's plan resolves. For example, the Republican fix takes decades to materialize substantial savings, which does nothing to offset the cash shortfall Social Security will experience by 2035. The Democrats' plan, however, immediately tackles this by boosting revenue.
On the other hand, the Democrats' efforts to boost revenue ignores clear demographic shifts, such as lower birth rates, lower net immigration, and increased longevity. The GOP's solution would help tackle this by reigning in longer-term outlays.
The fact of the matter is that the longer Congress waits to fix Social Security, the more painful and costly that fix is going to be on working Americans, who front the bill for funding the program. This is unfortunate, as history shows Congress to have a penchant for waiting until the last minute to pass bipartisan amendments to the program. We can only hope our elected representative wise up about Social Security's very real cash-flow problems sooner than later.