For most Americans, relying on Social Security income during retirement is the expectation. Surveys conducted by national pollster Gallup earlier this year found that 88% of future retirees expect to lean on Social Security income, to some degree, to make ends meet. For nonretirees, this represents an all-time high, dating back through two decades of surveys.
It's an equally important source of income for current retirees, with Social Security Administration data showing that better than 3 in 5 seniors leans on their monthly stipend to account for at least half of their income.
In other words, it's an indispensable program that's singlehandedly responsible for keeping more than 22 million people a year out of poverty.
And it's also in trouble.
Could you survive a $5,800 annual reduction to your Social Security retirement benefit?
Every year, the Social Security Board of Trustees releases a report that examines the program's short-term (10-year) and long-term (75-year) outlook. For the past 35 years, the trustees' report has cautioned that long-term revenue collection would be insufficient to cover outlays. Or, in English, Social Security won't bring in enough money to sustain its current payout level. It's been estimated that the program's $2.9 trillion in asset reserves will be completely exhausted by 2035.
The good news, if there's any to be plucked from this forecast, is that Social Security is in no danger of going bankrupt or becoming insolvent. Two of Social Security's three sources of revenue -- the 12.4% payroll tax on earned income and the taxation of benefits -- are recurring, which means that as along as Americans keep working, money will always be flowing into the program for disbursement to eligible recipients.
However, once Social Security's asset reserves are depleted, sweeping benefit cuts may be needed to sustain payouts. Based on the latest trustees' report, retired workers and survivors are looking at an up to 24% benefit cut by 2035.
What would this actually look like for the typical retired worker? For context, the average retired worker was receiving approximately $1,503 a month when 2020 began. Assuming cost-of-living adjustments averaged 2% a year through 2035, the typical retired worker would net $2,022.84 a month. If benefit cuts are enacted in 2035 to preserve payouts for the long-term, the average retired worker would lose $485.48 a month in income, or $5,826 over the course of a year.
Here's why Social Security finds itself in big trouble
How does a program that's been paying retired worker benefits without fail for more than eight decades suddenly get to the point where massive benefit cuts are just 15 years (or less) away? The answer lies with a number of ongoing demographic changes.
Aside from the most obvious changes, such as baby boomers leaving the work force and longevity increasing, growing income inequality is one issue to blame. The wealthy often have little or no financial constraints when it comes to paying for preventative care, medical care, or prescription medicines. The same cannot be said for low-income folks. This disparity allows the rich to live notably longer, and thereby collect a bigger monthly check for a longer period of time. Over multiple decades, this has weighed on the Social Security program.
Some blame can also be assigned to record-low birth rates. The Social Security program counts on a steady number babies being born so that the worker-to-beneficiary ratio won't fall when future generations of workers retire. But with millennials waiting longer to get married and have children, the worker-to-beneficiary ratio could be under added pressure.
Even immigration is a problem -- but probably not in the way you're thinking. Social Security relies on steady levels of net legal immigration into the U.S. every year. Most migrants tend to be young, and therefore spend decades in the labor force contributing via the payroll tax. Over the past 20 years, net legal immigration levels have been halved, which threatens the worker-to-beneficiary ratio.
And just to be clear, illegal immigration isn't to blame, and Congress didn't steal a dime from Social Security.
Hope for a fix, but don't count on one
You're probably also wondering why lawmakers in Washington, D.C., haven't fixed this mess. There's a twofold answer to that question.
First, it's not for a lack of solutions. Both Democrats and Republicans have a core solution that works to strengthen the program. Rather, the issue is that both parties have a workable solution, and therefore have zero incentive to find common ground with their opposition. In other words, political hubris is part of the blame.
The second problem is that all Social Security fixes have consequences. No matter what fix is chosen, some group of people will be worse off than they were before. If the wealthy are taxed without receiving a commensurate increase in retirement benefits, then they're worse off. If the full retirement age is gradually raised, then millennials and generation Z will net less in lifetime benefits. Because every solution results in some group of people losing out, politicians are afraid of enacting Social Security reform and losing their elected seats.
Historically, lawmakers do act to save Social Security when it's in trouble, but they often wait until the 11th hour to do so.
We can certainly hope that Congress comes to the rescue of the Social Security program, as it's done in the past, but we shouldn't count on it. Instead, the tried-and-true method of budgeting, saving money, and investing for the future, is going to the best way to minimize our reliance on Social Security income during retirement.