For better or worse, Social Security is our nation's most important social program. Each month, 64.8 million Americans receive a payout, and 46 million of them are seniors. Of these seniors, 62% lean on Social Security to account for at least half of their monthly income.
Given Social Security's importance to the financial well-being of our nation's elderly, you'd think the program would be well-understood by the American public -- but that's often not the case. Myths and misinformation dominate, masking the truth about the program that current and future retirees need to know.
Here are seven blunt Social Security truths you need to hear.
1. Social Security can't go bankrupt
For the past 35 years, the annually released Social Security Board of Trustees report has cautioned that long-term (75-year) revenue collection would be insufficient to support outlays. Or in English, the program is facing a funding-obligation shortfall over the coming 75 years, which, as of the 2020 report, weighed in at $16.8 trillion. A mammoth shortfall like this has a number of folks (especially millennials) believing that Social Security simply won't be there for them when they retire.
Social Security absolutely needs some TLC from lawmakers in Washington, D.C., but is in absolutely no danger of insolvency. That's because two of the program's three sources of funding -- the 12.4% payroll tax on earned income and the taxation of benefits -- are recurring sources of income. As long as Americans keep working, revenue will continue flowing into the program for disbursement to eligible individuals.
However, keep in mind that just because Social Security can't go bankrupt, it doesn't mean sweeping benefit cuts are off the table.
2. Benefits are only designed to replace 40% of the average worker's wages
As noted, more than 3 in 5 current retirees rely on their monthly payouts to account for at least half of their income. Further, 34% of seniors count on Social Security as pretty much their sole source of income (90%-100%). In reality, both of these figures are far too high.
According to the Social Security Administration, retired worker benefits are only designed to replace about 40% of the average worker's wages during retirement. For low-income workers, this percentage could be a bit higher, whereas for high earners, it's a bit lower. The point is, Social Security income wasn't designed to be a sole or, in many instances, even a primary source of income during your golden years.
While you can count on Social Security income being there for you when you retire, you should also be saving and investing so you can have other sources of income available during retirement.
3. Congress didn't steal a dime from Social Security
There is no shortage of hypotheses as to why Social Security is facing an estimated $16.8 trillion cash shortfall. Chief among them is the idea that Congress borrowed or stole the money in Social Security's asset reserves and failed to pay it back. The thinking here is that if lawmakers repaid Social Security with interest, everything would be hunky-dory.
The blunt truth is that Congress hasn't stolen a dime from the program, and every cent is currently accounted for.
Social Security's asset reserves (i.e., its net cash surpluses built up since inception) are required by law to be invested in special-issue bonds and, to a lesser extent, certificates of indebtedness. Just because the program is holding federal bonds (as opposed to sitting on cash in a vault) doesn't mean the assets aren't there. Plus, holding bonds allows Social Security to collect interest income on what's borrowed. In 2019, almost $81 billion in interest income was earned by Social Security.
The fact is, the federal government repaying all of these bonds would actually make the program worse off than it is now.
4. Immigrants are a 100% positive for the program
Another theory behind Social Security's financial shortcomings is that immigration is at fault. The thinking here is that if Social Security income wasn't paid out to undocumented workers, the program would be in excellent financial shape.
This is also false.
For starters, legal immigration is an absolute must for the program's financial success. The Trustees' modeling counts on an average of at least 1.26 million legal net immigrants entering into the U.S. each year over the long term. Since legal migrants tend to be younger, they'll often spend decades in the labor force contributing via the payroll tax before receiving a retirement benefit of their own.
As for undocumented workers, they're not receiving a traditional Social Security benefit. Since they have no Social Security number, they're unable to receive traditional protections afforded by the program.
5. Fixing Social Security means some group(s) will be worse off than before
Debate has been ongoing for decades as to how to fix the Social Security program. If the Trustees' estimate is correct, and the program's $2.9 trillion in asset reserves are exhausted by 2035, sweeping benefit cuts of up to 24% may await retired workers and survivor beneficiaries.
While we don't know what a future fix might look like, what we do know is that every solution will result in some group or groups of people being worse off than they were before.
For example, if taxation is raised on high earners to boost near-term revenue, these well-to-do workers will be paying more into the program without a commensurate increase in future benefits. Likewise, if the full retirement age were to be gradually increased from its peak of age 67 in 2022 to, say, age 70, future generations of retirees would see their lifetime benefit potential reduced.
All Social Security fixes result in some group(s) being worse off than they were before.
6. Neither party's Social Security solution is a cure-all
Capitol Hill is certainly not hurting for solutions to resolve Social Security's estimated long-term cash shortfall. Both the Democrats' plan to increase taxation on the wealthy and the Republicans' solution to gradually increase the full retirement age make Social Security financially stronger. However, neither solution is, by itself, a cure-all.
The GOP's plan is designed to reduce program expenditures over time. But raising the full retirement age takes decades to realize substantive savings. Thus, the Republicans' plan wouldn't resolve Social Security's immediate funding crisis.
Meanwhile, the Democrats' fix to increase taxation on the wealthy would resolve the programs' short-term funding concerns, but it ignores a number of other ongoing demographic changes, such as record-low birth rates, increased longevity, and reduced levels of net legal immigration. As a result, expenditure cuts would be needed at some point to keep program outlays under control.
7. Congress has a history of waiting until the 11th hour to fix Social Security
Finally, you should understand that, while Congress has a history of passing bipartisan Social Security legislation to shore up the program, lawmakers tend to kick the can down the road a lot before actually taking action.
Why not tackle Social Security's shortcomings now? As I pointed out earlier, all Social Security fixes will result in some group of people being worse off financially than they were prior to a fix. This could result in the groups of people who end up worse off voting out of office the elected officials responsible for passing Social Security legislation. This possibility is what entices lawmakers to continually sweep Social Security's issues under the rug.
The last time a sweeping overhaul of the Social Security program was passed in Congress was 1983. This happens to be the year that Social Security's asset reserves would have been exhausted had lawmakers not passed legislation to shore up the program. If history is any indication, Congress is unlikely to tackle Social Security's cash shortfall until sometime in the next decade.