For many Americans, Social Security is a financial retirement lifeline. Over the past 20 years, annual surveys conducted by Gallup have shown that no less than 80% of retired respondents rely on their Social Security benefit as at least a "minor" source of income.
What's more, the Center on Budget and Policy Priorities estimates adults aged 65 and over would have a poverty rate of nearly 38% if Social Security didn't exist. With the program in place, the poverty rate of those aged 65 and up is only 9%, as of 2020.
The ongoing success of Social Security is paramount to the financial well-being of America's retirees. Unfortunately, our nation's most-prized retirement program is on ever-shakier ground.
Image source: Getty Images.
The Social Security Board of Trustees Report has been warning of trouble for decades
Every year since 1940, which is when monthly payments to retired workers began, the Social Security Board of Trustees has released an annual report on the financial health of the program. This often-lengthy report examines the current finances of Social Security, as well as makes assumptions about its future solvency while taking into account factors such as fiscal policy and demographic changes.
For the past 38 years, the Trustees Report has warned of a long-term funding shortfall. The "long term" is defined as the 75 years following the release of a report. In other words, if Social Security payouts were to stay on the same trajectory, inclusive of annual cost-of-living adjustments (COLAs) passed along most years, there wouldn't be enough revenue coming in to support these payouts over the coming 75 years.
Last week, the Social Security Board of Trustees released its 2023 report, and it revealed more bad news for those who are currently relying on Social Security to make ends meet. According to the 2023 Trustees Report, Social Security's long-term funding shortfall grew by $2 trillion from the 2022 report to $22.4 trillion.
More importantly, the Old-Age and Survivors Insurance Trust Fund (OASI), which is responsible for paying benefits to nearly 49 million retired workers and 5.8 million survivors each month, is expected to exhaust its asset reserves (i.e., the amount of excess cash built up since inception) by 2033. While this doesn't mean the OASI is insolvent -- Social Security can't go bankrupt, given how it generates revenue -- the Trustees Report does suggest the OASI will only be able to pay 77% of benefits after 2033.
In short, current and future retirees could be kissing 23% of their Social Security check goodbye in 10 years if something isn't done to address the program's issues.
Image source: Getty Images.
Demographic changes are doing a number on Social Security
To be clear, there isn't one prevailing headwind weighing on Social Security. Rather, it's a confluence of demographic shifts that are working against the program's financial well-being.
Some of these changes you're probably familiar with, such as the ongoing retirement of baby boomers, which is pulling down the worker-to-beneficiary ratio. What you might not realize is that increased longevity is a problem, too. While living longer is fantastic news in the sense that we get to spend more time with the people we love and care about, Social Security wasn't designed to pay beneficiaries for multiple decades. Since the program's inception, the full retirement age has risen by just two years (65 to 67), while the average life expectancy is up about 13 years (63 to 76).
Other demographic shifts are doing a number on Social Security. For example, the U.S. fertility rate hit a record low in 2020. While some of this could be blamed on the COVID-19 pandemic, other factors include couples waiting longer to get married and have kids, as well as fewer unplanned pregnancies. If there aren't enough new births, there won't be enough workers to prop up the worker-to-beneficiary ratio in the decades to come.
Another example is the precipitous decline in legal immigration into the U.S. over the past 25 years. Most legal immigrants are young, and will therefore spend decades in the labor force, contributing to Social Security via the payroll tax on earned income. Based on data from the United Nations, the net migration rate into the U.S. is down 57% since 1998.
Even income inequality is an issue for Social Security. In 2023, all earned income, meaning wages and salary but not investment income up to $160,200, is subject to the 12.4% payroll tax. Any earned income above $160,200 escapes the payroll tax. Over the past four decades, the nominal amount of earnings avoiding the payroll tax has grown considerably.
Unless these issues are addressed, digging out of an estimated $22.4 trillion hole will prove incredibly difficult.
Congress has done Social Security no favors
To make matters worse, elected lawmakers in Washington aren't doing retirees any favors.
Thanks to the annually published Board of Trustees Reports, Congress has known about Social Security's long-term cash shortfall since 1985. Despite this, the last major overhaul of the program occurred in 1983. The Amendments of 1983 gradually raised the payroll tax rate and full retirement age, as well as introduced the taxation of benefits.
Lawmakers certainly aren't lacking for proposals to strengthen Social Security. The problem has been that Democrats and Republicans are approaching their proposed "fixes" from opposite ends, and they've been unwilling to find any common ground.
For instance, Democrats have proposed increasing the payroll tax on high earners by limiting or eliminating the payroll tax earnings cap (the aforementioned $160,200 figure in 2023). However, Republicans won't support legislation that targets high earners. Likewise, Republicans want to gradually increase the full retirement age, which would reduce lifetime benefit collection for future retirees. Democrats have voiced their opposition to any legislation that would reduce benefits.
Amending Social Security will require 60 votes in the U.S. Senate, and it's been 44 years since either party held a supermajority of at least 60 seats in the upper house of Congress. It means that if lawmakers are going to tackle what ails Social Security to stave off a potential reduction in Social Security checks of 23% in the next 10 years, they're going to have to work together -- and this appears unlikely to happen anytime soon.
