For most Americans, Social Security is a program they'll come to lean on in some capacity during retirement. Close to 90% of current retirees are reliant on their monthly Social Security payout to meet their expenses while, according to a 2022 Gallup survey, 84% of future retirees believe they'll need their Social Security benefit to make ends meet.
Unfortunately, America's top retirement program is flashing a gigantic warning that can no longer be swept under the rug.
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The one number that shows Social Security is in big trouble
Every year since retired-worker payments began in 1940, the Social Security Board of Trustees has released a lengthy report detailing the short-term (10-year) and long-term (75-year) outlook for the program. The Trustees Report takes into account a number of changing demographic variables, economic-growth outlooks, fiscal policy, and other factors to effectively determine how financially "healthy" Social Security is over a specified time frame.
Since 1985, every annual Trustees Report has sounded the warning that Social Security wouldn't bring in enough revenue over the long term to cover the benefits it pays out, including cost-of-living adjustments. This estimated cash shortfall in the 75 years following the release of a Trustees Report has somewhat consistently grown. In 2022, the program's deficit stood at a jaw-dropping $20.4 trillion through 2096.
But this isn't the number that shows how much trouble Social Security is in. As long as the program's asset reserves kept growing -- i.e., the cash built up since inception -- lawmakers could continue to sweep the issue under the rug without too much chatter. From 1982 through 2020, this is exactly what happened, with Social Security's asset reserves growing from $24.5 billion to about $2.91 trillion.
But things changed in 2021. Last year, Social Security's asset reserves declined by $56.3 billion. In other words, Social Security's outlays were larger than the revenue in brought in for the first time in close to four decades. And it's set to happen again in 2022.
By law, Social Security's asset reserves are required to be invested in special-issue government bonds and, to a lesser extent, certificates of indebtedness. Because this excess capital is invested in low-risk assets and earning interest, anyone can freely and publicly check the aggregate value of Social Security's asset reserve portfolio every month.
In November 2022, Social Security held $2.805 trillion in these bonds and certificates of indebtedness. Over the previous 11 months, its asset reserves have fallen by $47 billion. This is the figure that clearly shows Social Security is in big trouble.
According to the 2022 Trustees Report, the remaining asset reserves could be depleted by as soon as 2034 for the Old-Age Survivors and Insurance Trust Fund (OASI). This is the trust responsible for paying over 48 million retired workers their benefit each month. Should these asset reserves be used up, OASI benefits could be slashed by up to 23% to sustain payouts without the need for any additional cuts through 2096.
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A multitude of demographic changes are weighing on America's top retirement program
If you're wondering why, after 38 years, Social Security's steady growth in its asset reserves has now reversed course, look no further than a plethora of demographic shifts that are adversely impacting the program.
One change that most folks are probably well aware of is the ongoing retirement of baby boomers. As boomers leave the workforce in greater numbers, there simply aren't enough new workers entering it to keep the worker-to-beneficiary ratio from falling.
But something most people might not be aware of is that increasing longevity isn't helping. While modern medicine helping us live longer, fuller lives is great, Social Security was never designed to pay benefits to retirees for decades at a time. Since 1940, the full retirement age has increased from 65 to 67, while the average life expectancy has risen from 63 years to 76. That's putting a lot of strain on Social Security.
Another problem is that the U.S. birth rate fell to an all-time low in 2020. While some of this can be blamed on the COVID-19 pandemic, birth rates in the U.S. had been falling for more than a decade. If the U.S. birth rate doesn't pick up, added pressure will be placed on the worker-to-beneficiary ratio.
Legal immigration into the U.S. presents another challenge. Over a two-decade stretch, average annual net migration into the U.S. dropped by 46%. Since legal immigrants tend to be younger, they can provide decades of payroll-tax revenue for Social Security while in the U.S. labor force. Fewer migrants entering the U.S. means less payroll-tax revenue.
Even income inequality has become a growing problem for Social Security. In 2023, all earned income (wages and salary, but not investment income) between $0.01 and $160,200 is subject to the 12.4% payroll tax. However, high-earners won't owe any payroll tax on wages and salary above $160,200. Every year, well over a $1 trillion in earned income "escapes" the payroll tax.
Don't expect lawmakers to address Social Security's worsening financial health anytime soon
Despite Social Security reaching this ominous milestone in its storied history, current and future retirees shouldn't expect action from elected officials on Capitol Hill anytime soon.
Without getting too far into the weeds, both Democrats and Republicans recognize Social Security is in need of changes that would strengthen it financially. However, both parties have approached their respective "fix" from ideologically opposite ends of the spectrum.
Democrats want to increase payroll taxation on high earners and use a new cost-of-living adjustment calculation specifically focused on the elderly. Meanwhile, Republicans prefer gradually increasing the full retirement age and instituting the Chained Consumer Price Index as the preferred cost-of-living adjustment measure. With both parties believing they have the solution that works best, neither has an incentive to find a middle ground with their opposition.
The other plain-as-day problem is that Social Security laws can't be amended without 60 votes in the Senate. Neither party has held at least 60 seats in the Senate in 43 years, which means bipartisan cooperation is the only way any Social Security legislation will be signed into law.
Keep in mind that Congress does have a history of coming together to resolve Social Security's financial issues but waited until the proverbial 11th hour to do so. When the Social Security Amendments of 1983 were signed into law by then-President Ronald Reagan, the program's asset reserves were running on fumes. Current and future beneficiaries will likely need to wait years before lawmakers tackle what's becoming a serious financial hole for America's top retirement program.
