According to Independent Vermont Senator Bernie Sanders in his 2016 book, Our Revolution, "Social Security is the most successful government program in our nation's history." And he's right.
An analysis from the Centers for Budget and Policy Priorities finds that the elderly poverty rate with Social Security is around 9%. Comparatively, it would be more than 40% if the program didn't exist. For over 80 years, Social Security has ensured that tens of millions of retired workers have had a guaranteed stream of monthly income and is responsible today for singlehandedly keeping over 22 million beneficiaries above the federal poverty line.
However, it's also a program that's on shaky financial footing.
Social Security has a whopping $16.8 trillion in unfunded obligations
Every year, the Social Security Board of Trustees releases a report highlighting the short-term (10-year) and long-term (75-year) outlook for the program. Since 1985, the Trustees report has cautioned lawmakers that long-term revenue generation wouldn't cover outgoing expenses. As of the 2020 report, Social Security's unfunded obligations have swelled to $16.8 trillion through 2094.
How exactly does a program with $2.9 trillion in asset reserves (i.e., net cash surpluses built up since inception) go from making more than 80 years of consecutive payouts to staring down an estimated shortfall of $16.8 trillion? The answer lies with a number of ongoing demographic changes.
Much of the finger-pointing is usually cast at baby boomers for simply being born and now leaving the workforce in great numbers. But there's more to it than just this. In addition to boomers retiring, we're witnessing:
- Increased longevity, thereby allowing seniors to receive a Social Security benefit for two decades or possibly longer.
- Growing income inequality, which is resulting in the rich living notably longer than low-income individuals and therefore collecting a larger payout for a longer period of time.
- Record-low birth rates, which threatens to weigh down the worker-to-beneficiary ratio even more.
- Lower legal net-immigration rates that can also weigh on the worker-to-beneficiary ratio.
Because of these issues and more not mentioned here, the Social Security program is expected to completely exhaust its $2.9 trillion in asset reserves by 2035.
Could Social Security ever become insolvent and disappear?
The question a lot of folks are left to wonder is, what happens then? In other words, if Social Security completely depletes the $2.9 trillion in cash surpluses built up since inception, what happens to the program and people's current or future payouts?
The answer isn't as horrible as you might think -- but it's not great news, either.
Pardon the pun, but the silver lining for seniors who are in some way reliant on Social Security to help make ends meet during retirement is that the program is almost certain to never go bankrupt or disappear. The reason is that two of Social Security's three sources of income are recurring.
In 2019, Social Security collected $1.06 trillion from three sources of revenue:
- The payroll tax brought in $944.5 billion.
- Net interest income generated $80.8 billion.
- The taxation of benefits delivered $36.5 billion.
Of these revenue sources, net interest income isn't recurring. This is to say that if Social Security's asset reserves were completely exhausted, there would be no money left from which to generate interest income. But the 12.4% payroll tax on earned income and the taxation of Social Security benefits are recurring. As long as the American public continues to work, money will always be flowing into the Social Security program for disbursement to eligible beneficiaries.
The point here is that Social Security doesn't need a dime in its asset reserves to continue to make payments to current or future retirees.
Pretty much the only thing that could spiral Social Security into insolvency would be a congressional vote to change how the program is funded. However, this is highly unlikely, as it would almost certainly result in widespread unrest among seniors and future retirees.
Survivability, check. Payout sustainability, not so much.
While Social Security never going bankrupt or disappearing is fantastic news for current or future retirees, there's a downside to having $16.8 trillion in unfunded obligations. If lawmakers don't figure out how to bridge this gap with additional revenue, outlay reductions, or some combination of these two strategies, an across-the-board benefit reduction awaits Social Security recipients by 2035. Per the 2020 Trustees report, this benefit cut could be as much a 24% for retired workers and those receiving survivor benefits.
The holdup in resolving Social Security's cash shortfall has nothing to do with ideas and pretty much everything to do with political differences.
Democrats would prefer to approach a fix by generating additional revenue for the program. This would be done by raising or eliminating the payroll tax earnings cap. You see, all wages and salary between $0.01 and $137,700 are subject to the 12.4% payroll tax in 2020, with earned income above $137,700 exempt from this tax. Between 1983 and 2016, the amount of income exempt from the payroll tax has roughly quadrupled to $1.2 trillion. Raising or eliminating this cap would require the well-to-do to pay more into the system.
Meanwhile, Republican lawmakers have proposed a gradual increase to the full retirement age -- i.e., the age where you become eligible to receive your full monthly payout, as determined by your birth year -- which is currently set to peak at age 67 in 2022. The GOP would like to see this figure gradually raised to as high as age 70. In doing so, current and near-term retirees would see no change, while future beneficiaries would either have to wait longer to receive their full payout or take a steeper reduction for claiming their benefit early. The point is, lifetime benefits paid are reduced with this strategy.
Since both of these strategies work to strengthen Social Security, neither side is willing to work with their opposition on a middle-ground solution.
In sum, Social Security's survivability isn't in question. However, the sustainability of the current payout schedule, inclusive of cost-of-living adjustments, is very much in question. If you're eligible for a payout, you'll be receiving one. Just understand that this payout could be reduced depending on what lawmakers do -- or don't do -- in the coming 15 years.