Every month, more than 64 million people receives a Social Security benefit check, of which roughly 70% are retired workers. For these retirees, 62% lean on their payout to account for at least half of their income, with 34% reliant on Social Security for a whopping 90% to 100% of their incoming funds. It's been estimated by the Center on Budget and Policy Priorities that, without Social Security, elderly poverty rates would more than quadruple in the United States.
In other words, Social Security is not only the most successful social program in existence, but it's indispensable.
It also happens to be a program that's in pretty serious trouble -- and the hole lawmakers have dug for it keeps deepening.
Seniors could face a 24% cut to their Social Security benefit in 15 years
A little more than a week ago, the Social Security Board of Trustees released its annual report on the financial health of the program. It examines both the short-tem (10-year) and long-term (75-year) outlook for Social Security, as well as tackles what variables could help or hinder the program, such as changes in economic growth, interest rates, fiscal policy, birth rates, death rates, and net immigration. As has been the case for years, the latest report shows that things are getting worse for our most-storied social program.
In the latest report, perhaps the one "positive" was the view of the Trustees that 2021, not 2020, would represent the first year of net cash outflows from the program since 1982. Then again, I'd bet the house that this forecast is wrong given that the Trustees haven't taken into account the impact of the coronavirus disease 2019 (COVID-19) in their short-range forecast. With over 26 million people losing their jobs, and unemployment benefits exempt from the payroll tax, there's no chance, in my opinion, that the program generates a cash surplus in 2020.
Then there are the negatives. The Trustees are still counting on the program to burn through its nearly $2.9 trillion in asset reserves (i.e., its net cash surpluses built up since inception) by 2035. This is the same expectation published in last year's report.
However, the cash shortfall beyond 2035 grew substantially due to a number of modeling adjustments implemented by the Trustees. While expenditures tied to the Disability Income Trust should actually come in lower than prior expectations over the long-term, new modeling lowered the real interest rate by 20 basis points to 2.3%, reduced consumer price inflation by 20 basis points to 2.4%, and lowered the total fertility rate to 1.95 births per women from 2.0. All told, this pushed the projected cash shortfall to $16.8 trillion between 2035 and 2094, up $2.9 trillion from last year's projection of $13.9 trillion.
If lawmakers fail to act to strengthen Social Security, the Old-Age and Survivors Insurance Trust will only be able to pay 76% of benefits after 2035. Put in another context, retired workers and survivors, which respectively make up 45.5 million and 5.9 million of the 64.5 million current beneficiaries, as well as future retirees, would see their payouts reduced by 24%.
Why is Social Security suddenly in so much trouble?
You might be asking yourself how a social program that's been paying out benefits without a hitch for more than 80 years could dig itself a $16.8 trillion hole? The answer can't be pinned on just one factor. Rather, it's a confluence of factors that've built up over time.
For example, baby boomers often get pinned for this mess given that they're retiring from the workforce in greater numbers and driving down the worker-to-beneficiary ratio. But boomers being born is far from the only reason Social Security will soon be outlaying way more than it collects every year.
For one, we're living significantly longer now than we were when the program first began paying benefits in 1940. But while the average life expectancy at birth has risen more than 16 years for the average American over the last eight decades, Social Security's full retirement age -- the age where you become eligible to receive your full monthly payout, as determined by your birth year -- will have risen only two years, as of 2022. In other words, increased longevity is allowing the average 65-year-old to receive a benefit check for 20 years, and it's clearly straining the program.
Another problem is declining birth rates, which the Trustees somewhat adjusted in their newest model. Births per women in the U.S. have plunged to an all-time low, with millennials waiting longer to get married, gaining easier access to contraceptives, and having fewer unplanned pregnancies. If this lower birth trend continues, the worker-to-beneficiary ratio will fall even more.
Immigration rates are another culprit. The fact is that Social Security relies on a healthy annual net immigration rate into the United States. Immigrants tend to be younger, which means they're likely to contribute in the labor force via the payroll tax for decades to come. But over the past 20 years, net immigration into the U.S. has been on a pretty steady decline.
Also, don't overlook growing income inequality as a fault. Since the rich often have few if any financial constraints when it comes to paying for preventative care, medical care, and prescription medicines, they're living substantially longer than low-income individuals who may not have this same access to medical care and prescriptions. Thus, even though Social Security is designed to protect low-income Americans during retirement, it's really putting cash into the pockets of well-to-do Americans for a longer period of time.
Is this the biggest issue of all for Social Security?
However, the biggest of the more than half-dozen issues plaguing Social Security just might be the inaction of lawmakers on Capitol Hill.
You see, Congress has known since 1985 that Social Security wasn't going to generate enough cash over the following 75 years to maintain its payout schedule. For 35 years, Congress has known that some form of intervention, be it outlay reductions or additional revenue, would be needed to help strengthen the program. And yet, they've mostly twiddled their thumbs in Washington, D.C., over that time frame.
Mind you, ideas on how to fix Social Security aren't the issue. Each political party has a core solution that would, in some way, make Social Security a stronger program. Democrats prefer raising additional revenue by increasing or removing the payroll tax earnings cap, thereby requiring the well-to-do to pay more into the system. Meanwhile, Republicans prefer gradually increasing the full retirement age to reduce lifetime outlays to future retired workers.
The problem is that, since both solutions work, neither party feels the need to cede an inch to find common ground with their opposition. But the longer lawmakers wait to fix the problem, the more burdensome the eventual cost will be on working Americans. In just a few years, the long-term cash shortfall has ballooned from $11.4 trillion to $16.8 trillion -- and it's liable to continue climbing the longer Congress waits to act.
History shows that lawmakers do act in a bipartisan manner at the 11th hour when it comes to Social Security, but that's not going to do much to allay retirees' fears about the possibility of a 24% cut to benefits in just 15 years.