Social Security is an essential part of American life. The program pays a regular, monthly income to millions of American retirees -- more than 70 million last year. For many, it provides a meaningful supplement to personal savings and a measure of safety. To others, it is almost all they have. In fact, for the bottom 40% of earners, Social Security accounts for 84% of their post-retirement income. What would these Americans do without Social Security?
Despite the essential role it plays in our society, Social Security has a history of being, at times, on somewhat shaky financial footing. Sweeping changes during the 80s and 90s -- including increasing taxes on Social Security benefits -- put the program in a position to remain solvent.
Falling birth rates are putting a massive strain on Social Security, and huge cuts could be coming
The program works because young, healthy workers pay into it while those enjoying their golden years draw from it. As long as the balance between workers and retirees is maintained, the program is solvent. The ratio between workers and retirees is affected by several things, such as immigration and (to a lesser extent) increasing lifespans, but the single biggest factor is the national birthrate, which has been falling for years. With fewer healthy, productive workers in relation to retirees than there once were, less is paid into Social Security than is paid out.
The Social Security Administration estimates the coffers will be empty by the end of 2033. At that point, it will only be able to pay out what it brings in. What does that mean in real numbers? An across-the-board cut of 25%, which works out to be just shy of $17,000 per couple in 2034. For context, if a 25% cut happened today, the average couple would lose about $11,500 a year.
That would have a massive effect on most beneficiaries' lives. For that 40% who rely on Social Security for the lion's share of their income, it could be catastrophic. Here's the thing: Only 30% of Americans even know this could be coming. Said another way, 190 million American adults have no idea. But don't panic -- there's still time to act.
If Congress wants to avoid gutting Social Security, it needs to act. Here's what that might look like
The truth is, getting Congress to not just act, but agree on how to act, is an uphill battle. Maybe that's a surprise to no one -- after all, Congress's approval rating is near an all-time low. But hope springs eternal, right? Something has to be done.
The primary strategies proposed to fix Social Security can be boiled down to two main avenues: increasing revenues -- i.e. raising taxes -- or reducing costs -- i.e. cutting benefits. But what exactly do these measures look like? Do we enact a combination of the two?
Let's look at some of the more popular proposals. The simplest way to compare apples to apples here is to consider how each will affect the long-term budget shortfall as a percentage of total taxable payroll. The SSA projects a long-term shortfall of 3.5%. Any combination of measures has to add up to at least 3.5%.
One recent plan from an influential group of lawmakers proposes "modest adjustments to the retirement age." The plan doesn't specify the exact age, but let's say we raised the early retirement age and normal retirement age 2 years to 64 and 69, respectively -- note this would happen gradually over time until the ages reached their new levels in 2031. This would make up about 0.9 percentage points of the shortfall.
Another popular proposal on the other side of the aisle is to raise the cap on Social Security tax or eliminate it entirely. Currently, wages over $168,600 are not taxed. If we were to eliminate the cap entirely while scaling benefits to match -- as it stands, wages over the limit may not be taxed, but they don't earn you benefits -- we would make up another 2 percentage points.
There are certainly other proposals, but I hope this illustrates that the problem is unlike to be solved by a single approach. It will take a bipartisan effort that is likely to combine both revenue-raising and cost-reducing measures. Whatever the details, something needs to be done before 2033. It would seem like a good idea to get the ball rolling now, however, given how long it might take to reach a consensus.
I have faith that action will be taken, but remember, Social Security was never intended to be the primary source of income for retirees. It was designed to be part of a multifaceted approach that included pensions and personal savings. Obviously, pensions are not as common anymore for non-public employees, but the point remains: Focus on what you can control to the best of your ability. Smart and disciplined investing early in life can set you up to retire in peace and security.
