For 84 years, Social Security has been doling out monthly benefit checks, without fail, to eligible retired workers. Even though the average retired-worker check totaled just a little over $1,900 in January 2024, this payout represents a necessary source of income to make ends meet for the vast majority of current and future retirees.
Unfortunately, the program that tens of millions of aging Americans have come to rely on for their financial well-being is on ever-shakier ground.
Image source: Getty Images.
Social Security's funding shortfall has grown to more than $22 trillion
Every year since 1940, the Social Security Board of Trustees has released a report outlining the current financial health of America's top retirement program, as well as provided a short-term (10-year) and long-term (75-year) outlook. The Trustees outlook takes a number of monetary and fiscal policy changes, along with demographic shifts, into account to determine what might happen with the program's asset reserves, as well as payouts, over the short- and long-term.
Since the 1985, the Trustees have identified a long-term funding obligation shortfall. In other words, revenue collection in the 75 years following the release of a report isn't expected to cover expenses, which includes benefits paid and, to a far lesser extent, administrative expenses. As of 2023, the long-term funding obligation shortfall for Social Security had swelled to $22.4 trillion.
The more immediate concern is what might happen to Social Security benefits in less than a decade. The 2023 Social Security Board of Trustees Report estimates that asset reserves for the Old-Age and Survivors Insurance Trust Fund (OASI) -- i.e., the trust that pays retired workers and survivor beneficiaries each month -- could be exhausted by 2033. Should that happen, sweeping benefit cuts of up to 23% may be needed to avoid additional reductions through 2097.
If you're wondering how America's most-treasured retirement program got into this mess, ongoing demographic changes take most of the blame.
Some of these changes are well-known, such as the retirement of baby boomers and substantially increased longevity since retired-worker payouts first began in January 1940. As boomers leave the labor force, it'll continue to weigh on the worker-to-beneficiary ratio. Meanwhile, Social Security was never intended to provide benefits for decades, which has become somewhat of a norm as life expectancies have risen over more than 80 years.
However, some demographic shifts aren't as well-known. This includes a more-than-halving in the net migration rate into the U.S. since 1998. Legal immigrants tend to be younger and are liable to spend decades in the workforce contributing to the program via the payroll tax.
Rising income inequality is taking its toll, as well. A higher percentage of earned income (wages and salary, but not investment income) is "escaping" the 12.4% payroll tax compared to the mid-1980s.
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Congress can't fix this problem, and it's costing Social Security dearly
These two lesser-known issues -- falling legal net-migration rates and rising income inequality -- can be directly addressed by lawmakers on Capitol Hill, should they choose to do so. But not every demographic change affecting Social Security can be fixed by Congress.
Perhaps the biggest issue for Social Security is its baby problem. In 2021, the U.S. total fertility rate bounced ever-so-slightly off of its all-time low to 1.664. "Total fertility rate" refers to the number of children a woman would be expected to have during her lifetime. For context, the all-time low was hit in 2020 at 1.64, and a total fertility rate of 2.1 is needed for a generation to completely replace itself.
A historically low birth rate is a big deal for eligible beneficiaries looking about 10 to 20 years into the future. As Americans reach retirement age and leave the labor force, the expectation is that new workers will step in to take their place. But if birth rates are sustainably low, the worker-to-beneficiary ratio would be expected to come under further pressure. In plainer English, there wouldn't enough payroll tax revenue generated from new workers entering the labor force to sustain the existing payout schedule for existing and future beneficiaries.
According to estimates from the 2023 Social Security Board of Trustees Report, the intermediate-cost outlook (i.e., the one likeliest to happen) calls for a long-term fertility rate of 1.99 and an actuarial deficit of 3.61%. Based on the high-cost scenario of a long-term total fertility rate of 1.69 through 2097, the actuarial deficit grows to 4.32%. The total fertility rate in 2021 was below even the high-cost estimate in the 2023 Trustees' Report. A sustained lower birth rate would be expected to increase Social Security's unfunded obligations through 2097 by trillions of dollars.
For those curious, a number of postulations have been made as to why Americans (more specifically, millennials) are having fewer children. A relatively recent online survey from Pew Research Center of non-parent adults aged 18 to 49 found that 56% simply didn't want kids. Of the remainder who cited other reasons for not having kids, medical reasons, financial reasons, or not having a partner were prominent answers.
If U.S. birth rates don't normalize sooner than later, it's going to cost Social Security dearly.
The OASI's asset reserves could be exhausted by 2033. US Old-Age and Survivors Insurance Trust Fund Assets at End of Year data by YCharts.
News flash: Congress deserves its fair share of the blame for Social Security's woes
Although lawmakers have no control over whether or not couples are having kids, they're not absolved from blame when it comes to Social Security's worsening financial situation. Failing to tackle its other shortcomings and kicking the can down the road is only going to make an eventual fix costlier and/or more painful for working Americans and retirees.
The issue for lawmakers isn't that they don't recognize a problem exists. Both Democrats and Republicans in the House and Senate realize America's top retirement program is in need of reform. The problem is that both parties have respective solutions that work and are, as of now, unwilling to find common ground with their opposition.
Democrats, including President Joe Biden, have offered a solution that would dramatically increase payroll taxation on the rich and raise benefits for lifetime low-earning workers and aged beneficiaries. Additionally, Democrats seek to replace the inflationary measure responsible for determining the annual cost-of-living adjustment (COLA) with the Consumer Price Index for the Elderly (CPI-E), which focuses solely on the spending habits of households with persons aged 62 and above.
Comparatively, Republicans have approached strengthening Social Security by gradually increasing the full retirement age to 70. Doing so would reduce long-term outlays for the program. Further, the GOP has proposed replacing the current COLA measure with the Chained Consumer Price Index. In short, the Republican plan reduces long-term expenses.
Though both approaches work, they're individually flawed. While the GOP plan would reduce long-term outlays, it does nothing to address the OASI's impending asset reserve depletion. Meanwhile, taxing the rich, by itself, doesn't come close to covering the program's $22.4 trillion (and widening) funding shortfall.
Social Security laws cannot be amended in the Senate without 60 votes in favor. This means bipartisan cooperation is a must to address the program's most-pressing issues. The longer lawmakers are at a stalemate, the more it's going to hurt future retirees.
