Social Security's importance to the financial well-being of our nation's retired workforce can't be overstated. It's a program that pulls 22.5 million people out of poverty every year (16.1 million of whom are seniors aged 65 and above), and is relied on by nearly 90% of retirees to make ends meet in some capacity during their golden years.
However, it's also a program in crisis.
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Sizable benefit cuts for retired workers may be only 11 years away
Every year since Social Security began dishing out monthly benefit checks to eligible retired workers in 1940, the Social Security Board of Trustees has released a report outlining the financial state and outlook for America's top retirement program. This usually lengthy report accounts for every dollar collected in revenue, shows where each of those dollars gets disbursed, and makes assumptions about the future solvency of the program, based on fiscal policy and ongoing demographic changes.
Every Trustees Report since 1985 has estimated that Social Security wouldn't generate enough revenue in the 75 years following the release of a report to cover outlays, including cost-of-living adjustments. In plain English: Social Security is facing a long-term funding shortfall.
In the 2022 Trustees Report, this cash shortfall was estimated at $20.4 trillion through 2096. If lawmakers fail to amend Social Security in order to generate additional revenue, cut expenditures, or enact some combination of the two, it's projected that the Old-Age and Survivors Insurance Trust Fund (OASI), which is responsible for paying retired workers and survivors their monthly benefit, could face a 23% payment cut by 2034.
If there's a silver lining that supersedes this report, it's that Social Security can't go bankrupt. Since approximately 90% of the revenue collected by the program derives from the payroll tax on earned income (wages and salary), there will always be money coming in that can be distributed to eligible beneficiaries.
But this doesn't change the fact that potentially steep benefit cuts are on the not-too-distant horizon.
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Social Security's baby problem is beginning to rattle
There are more than a half-dozen factors adversely impacting the long-term financial health of Social Security, including a rough halving in the number of legal immigrants entering the U.S. over the past quarter-century. But perhaps the scariest demographic shift that threatens the livelihood of America's key retirement program is its baby problem.
For well over a decade, Americans have been having fewer children. Data from the Population Reference Bureau (PRB) shows the total fertility rate in the U.S. declined from 2.12 in 2007 to an all-time low of 1.64 in 2020. The "total fertility rate" describes the average number of children a woman would be expected to have in her lifetime, and it's based on "the childbearing rates of women in a population in a given year," according to the PRB.
For some added content, it takes a fertility rate of 2.1 for a generation to completely replace itself. The U.S. was 22% below that level in 2020.
A number of factors have led to this sizable drop-off in U.S. births. Some are front-and-center, such as weakening economic outlooks, the pandemic, and other factors that can cause prospective parents to question whether they can afford to bring a child into the world.
We've also witnessed improved awareness of contraceptives and increased access to preventative medical care, which has led to a reduction in teen pregnancies and unintended pregnancies.
But there are other factors at work that may not be so apparent. For instance, the Pew Charitable Trusts examined this issue in December and concluded that a slowdown in legal immigration into the U.S. -- specifically from Mexico into the Southern U.S. states -- was playing a key role in lowering U.S. birth rates.
There's no easy fix for this demographic shift
Although a sustained slowdown in birth rates isn't a problem for Social Security in the present, it becomes a serious issue a generation from now, when there are too few workers entering the labor force relative to the growing number of Social Security beneficiaries. As the worker-to-beneficiary ratio falls, Social Security's financial foundation becomes strained.
According to the 2022 Trustees Report, Social Security's estimated actuarial deficit is 3.42%, through 2096, if the fertility rate averages 1.99. The "actuarial deficit" is the amount payroll taxes would need to increase to offset Social Security's projected long-term cash shortfall.
But if the long-term fertility rate comes in at 1.69, the actuarial deficit jumps to 4.13% and implies a shortfall that's trillions of dollars larger than the estimated $20.4 trillion. In 2020, the U.S. fertility rate (1.64) was lower than even this high-cost projection.
Unlike Social Security's legal immigration problem, there's no easy/quick fix for steadily declining U.S. birth rates. Lawmakers on Capitol Hill do have the ability to pass legislation to increase revenue and/or reduce outlays in order to extend the timeline for when sweeping benefit cuts would become necessary. But doing so would require bipartisan cooperation, which has been difficult to achieve since the last sweeping overhaul of Social Security was signed into law in 1983.
Even though Congress has a history of stepping in to save Social Security in the eleventh hour, the program will need the U.S. fertility rate to normalize closer to 2 in future generations. If that doesn't happen, workers could see their tax liability to support retirees rise considerably, and future retirees could be looking at sizable benefit reductions.
This baby problem for Social Security has become ginormous, and it can no longer be swept under the rug.
