Whether you're ready for it or not, America's most successful social program, Social Security, is careening toward big problems.
Every year, the Social Security Board of Trustees releases a report detailing its short-term (10-year) and long-term (75-year) outlook for the program. In each of the past 35 years, the Trustees have estimated that not enough revenue would be generated over the long run to meet the projected outlays for the program. In 2020, Social Security's unfunded obligations swelled to $16.8 trillion, up $2.9 trillion from last year's report.
Social Security's problems go well beyond baby boomers retiring in greater numbers
How could this possibly happen to Social Security after hundreds of millions of Americans have paid into the program for more than 80 years? The answer lies with more than a half-dozen ongoing demographic changes. While folks are quick to lay the blame on baby boomers retiring from the labor force, there's a whole lot more going on.
For example, the rich deserve some of the blame. Since the well-to-do are unlikely to have financial constraints when it comes to receiving preventative care, medical care, and prescription medicines, they tend to live notably longer than low-income individuals. Thus, not only are the wealthy collecting a larger monthly benefit from Social Security, but they're also receiving this payout for an extended period of time.
Record-low birth rates are also to blame. Factors that include a weak/uncertain economy, better access to contraceptives, fewer unplanned pregnancies, and purposeful delays in getting married, have pushed U.S. birth rates to an all-time low. If not enough babies are being born, the worker-to-beneficiary ratio will come under pressure down the line.
Even immigration is a problem -- albeit not for the reason you might be thinking. Social Security counts on a steady stream of net legal immigration into the U.S. each year to help replace workers who retire and leave the labor force. Over the past two decades, the number of net legal immigrants into the U.S. has been declining, which also threatens to reduce the worker-to-beneficiary ratio.
Lawmakers are not hurting for Social Security solutions
What it comes down to is this: If lawmakers fail to tackle Social Security's nearly $17 trillion cash shortfall, the Trustees expect the program's $2.9 trillion in asset reserves will run dry by 2035. If this happens, across-the-board benefit cuts of up to 24% may be needed for then-current and future retired workers. Please note that Social Security is in no danger of going bankrupt, but benefit cuts are very much on the table if Congress twiddles its thumbs.
To be clear, lawmakers aren't hurting for ideas. There have been countless proposals in the House and Senate designed to strengthen the Social Security program, and they all revolved around two basic tenets: either increase revenue for Social Security or reduce program outlays.
Democrats on Capitol Hill have long favored the idea of raising additional revenue by increasing the maximum taxable earnings cap associated with the payroll tax. In 2019, the 12.4% payroll tax was responsible for $944.5 billion of the $1.06 trillion collected. It's extremely important to the well-being of Social Security.
But in 2020, only earned income up to $137,700 is applicable to the payroll tax. This allows higher-income individuals to be exempted on earnings above $137,700. Democrats want to end this loophole, which would therefore require these higher-income workers to pay more into the system.
Meanwhile, the Republican proposal has long been to gradually raise the full retirement age -- i.e., the age where a person becomes eligible for their full monthly payout, as determined by their birth year. Currently set to peak at age 67 in 2022, the GOP would prefer this figure be increased to age 70.
Implementing this increase would require future generations of workers to either wait longer to receive their full payouts or accept an even steeper permanent reduction to their monthly benefits if claiming early. The end result would be less in lifetime benefits paid to future generations of workers.
The best solution to the Social Security crisis is compromise
If we've got this abundance of solutions, you're probably wondering what the holdup is in resolving Social Security's funding crisis. The answer is that the Democrats and Republicans each have a core proposal that strengthens Social Security -- and because both ideas work, neither party believes there's a good reason to back down from their stance.
Yet the very thing that would resolve Social Security's funding shortfall through 2094 is plain as day: compromise.
Take the Republican proposal as an example. Although it would be effective at reducing Social Security's outlays, it's going to take multiple decades before significant savings are realized. That does nothing to help Social Security's imminent cash shortfall that could necessitate benefit cuts by as soon as 2035. This is where the Democrats' proposal comes in handy. Raising or eliminating the payroll tax cap provides an immediate revenue infusion that would almost certainly push back Social Security's asset-reserve depletion date by decades.
But at the same time, simply lifting the cap off of Social Security's payroll tax isn't a cure-all. Rather, it's just a pretty big Band-Aid that would help the program navigate the next couple of decades without the need to reduce benefits. Because we're seeing so many negative demographic shifts, such as record-low birth rates and a precipitous decline in net legal immigration, the Republicans' plan to reduce long-term outlays will prove necessary to keep expenses in check.
The only question left to ask is, how long will it take before lawmakers realize that compromise is the hands-down best way to resolve the Social Security crisis?