For most retired Americans, Social Security is a vital income source without which they'd struggle to make ends meet.
An analysis from the Center on Budget and Policy Priorities found that payments provided by this all-important program pulled an estimated 22.7 million people above the federal poverty line in 2022, including 16.5 million adults aged 65 and over. The mere existence of Social Security has slashed senior poverty rates from an estimated 38.7% without the program to 10.2% with it.
Meanwhile, more than two decades of annual Gallup surveys have shown that anywhere from 80% to 90% of polled retirees lean on their monthly payout to cover at least some portion of their expenses.
Image source: Getty Images.
Ensuring the long-term financial health of Social Security is of the utmost importance for current and future generations of retirees. Unfortunately, the latest Social Security Trustees Report confirms what's been predicted for decades. Namely, the financial foundation of America's leading retirement program is crumbling, and benefit cuts appear to be on the way.
Let's take a closer look at how we got to this point and when these forecasted benefit cuts could take place.
Social Security is facing a $23 trillion long-term funding shortfall
Every year since the first retired-worker check was mailed out in January 1940, the Social Security Trustees Report has examined the current financial health of this leading program. Additionally, the Trustees take into account myriad other factors, including fiscal and monetary policy changes and demographic shifts, to make assumptions about its short-term (10-year) and long-term (75-year) financial stability.
Following the last major bipartisan overhaul of Social Security in 1983, which introduced the taxation of benefits and gradually increased both payroll taxation on earned income and the full retirement age, Social Security consistently brought in more revenue than it outlaid via benefits and administrative expenses every year. This led the program's combined asset reserves for its Old-Age and Survivors Insurance Trust Fund (OASI) and Disability Insurance Trust Fund (DI) to grow from $24.9 billion in 1983 to a peak of $2.908 trillion in 2020.
However, nearly four decades of cash inflows have decisively shifted to outflows, with the combined asset reserves of the OASI and DI falling by $56.3 billion in 2021, $22.1 billion in 2022, and $41.4 billion in 2023.
Over the long term, the Trustees estimate Social Security is staring down a $23.2 trillion (and growing) funding obligation shortfall. To be clear, this doesn't mean the program is insolvent or facing bankruptcy. It does, however, imply that the current payout schedule, including annual cost-of-living adjustments (COLAs), won't be sustainable over the next 75 years based on the variables being examined. And for what it's worth, the Trustees have been warning of a long-term funding obligation shortfall every year since 1985.
However, the more immediate concern for beneficiaries is the OASI's projected asset reserve depletion date.
US Old-Age and Survivors Insurance Trust Fund Assets at End of Year data by YCharts.
Social Security benefit cuts may materialize sooner than you think
The OASI is responsible for doling out monthly benefits to more than 51 million retired workers and approximately 5.8 million survivor beneficiaries. Despite the OASI ending 2023 with $2.641 trillion in asset reserves, the Trustees have estimated an exhaustion date of 2033 for this excess capital.
To reiterate, even if the OASI's asset reserves were to disappear completely, Social Security wouldn't be insolvent or bankrupt. The 12.4% payroll tax on wages and salaries, coupled with the taxation of Social Security benefits, will generate recurring revenue that the program can disburse to eligible beneficiaries.
But based on the current payout schedule, sweeping benefit cuts of up to 21% may be necessary to sustain payouts for retired workers and survivor beneficiaries in just nine years, without the need for any further reductions, through 2098. Assuming an average annual COLA of 2.6% leading up to 2033 -- 2.6% is the average COLA over the trailing-20-year period -- sweeping benefit cuts of 21% would reduce the annual take-home pay for retired workers by more than $6,000!
What's to blame for Social Security's crumbling financial foundation?
Social media message boards are littered with some really bad takes that claim "Congress stole from Social Security" or "undocumented migrants receiving benefits" are the reason Social Security is in such bad financial shape. However, both of these long-running claims are patently false.
Social Security's growing financial predicament is primarily the result of five ongoing demographic shifts:
- Baby boomers are retiring: The most front-and-center of these shifts is the ongoing retirement of baby boomers. While the boomer generation played a key role in expanding Social Security's asset reserves in the 1980s, 1990s, and 2000s, it's now weighing heavily on the worker-to-beneficiary ratio as they exit the labor force.
- Increased longevity: Although average life expectancy in the U.S. (76.3 years, as of 2021) declined in the wake of the COVID-19 pandemic, it's up notably from the roughly 63 years it stood at when the first retired-worker check was mailed in 1940. The program was never designed to support payments to seniors for multiple decades.
- A more-than-halving in net migration into the U.S.: Social Security relies on a steady number of legal migrants entering the U.S. every year and contributing via the payroll tax. Unfortunately, net legal migration into the U.S. has declined for 25 consecutive years (1998-2023) and is down 58% since 1998.
- Rising income inequality: In 2024, all earned income between $0.01 and $168,600 is subject to the 12.4% payroll tax, while earnings above $168,600 are exempted. In 1985, nearly 89% of all wages and salary were subject to the payroll tax. But as of 2021, this figure had declined to just 81.4% of earned income.
- A historically low U.S. fertility rate: Lastly, the U.S. fertility rate hit an all-time low of 1.62 per woman in 2023. Myriad factors have resulted in fewer children being born, which will be problematic for the worker-to-beneficiary ratio in the years to come.
Image source: Getty Images.
Yes, there's a fix -- but it's easier said than done
Now that you have a better idea of how America's top retirement program got into this mess, let's tackle the pressing question, "Can it be fixed?"
The interesting thing about Social Security is that it's been in a bind before. Prior to the Social Security Amendments of 1983 being signed into law, the program's asset reserves were facing the possibility of being exhausted in short order. Lawmakers have a history of waiting until the 11th hour before stepping in to resolve one or more issues.
Even though lawmakers recognize clear deficiencies in Social Security, they're enticed to kick the can down the road. The reason is that any fix will be detrimental to at least some group of current or future beneficiaries.
For example, most Democrats in Congress favor increasing payroll taxation on high earners to generate extra income for Social Security. Both President Joe Biden and Vice President and presidential nominee Kamala Harris have proposed or supported reinstating the payroll tax on earned income above $400,000.
Even though this would impact only a small percentage of working Americans, it would nevertheless cause high earners to pay more in taxes but receive no additional benefit from Social Security, making them worse off than they were before.
Comparatively, Republican lawmakers want to gradually raise the full retirement age to as high as 70 to reduce long-term outlays. While this would have no impact on current and near-term retirees, it would reduce the lifetime benefits collected by future generations of workers.
Neither party wants to be blamed for making a group of Americans worse off than they were before amending Social Security -- especially during election season.
The other challenge to fixing Social Security is that it almost assuredly will require bipartisan support. Since no party has held a supermajority in the Senate since 1979, and 60 votes are required in the upper house of Congress to amend the Social Security Act, cooperation, not competition, will be needed.
Although these core proposals from Democrats and Republicans originate from opposite ends of the political spectrum, combining the two would potentially resolve much of what ails Social Security.
For instance, increasing payroll taxation would immediately address near-term funding shortfalls, which is something the Republican proposal fails to do. However, the GOP plan would help lower long-term outlays, which is something sorely missing in the Democratic Party plan to strengthen Social Security over the long run.
Social Security can absolutely be strengthened -- but a fix is easier said than done. In the meantime, sweeping benefits cuts of up to 21% remain firmly on the table for retired workers and survivor beneficiaries nine years from now.
