Nearly all Americans share the belief that they'd like to retire comfortably. For many people, however, the chances of this happening is, for a variety of reasons, becoming increasing slim. Perhaps the biggest issue revolves around Social Security, the financial backdrop designed to protect low-income workers and their surviving beneficiaries should they pass away, as well as the disabled.
Social Security's dual woes
The Social Security program is falling victim to two major demographic shifts.
First, people are living longer than ever before. According to the Centers for Disease Control and Prevention the average life expectancy of men and women combined in the U.S. is 78.8 years. When baby boomers were born the average life expectancy was at, or under, 70 years, demonstrating how much of a jump we've experienced through improved health awareness and pharmaceutical/medical device advancements. Living longer means being able to receive Social Security distributions over a longer length of time. For the Social Security program, it means even more benefits flowing out of the Old-Age, Survivors, and Insurance Trust, or OASDI.
The other major shift is the retirement of the baby boomer generation, which has shifted into high gear and will be ongoing throughout the next 15 years. There simply aren't enough workers coming into the workforce to replace those boomers who are retiring. The net result is the worker-to-beneficiary ratio is expected to fall from 2.8-to-1 in 2014 to 2.1-to-1 by 2040 based on estimates from the Social Security Administration. Fewer workers per beneficiary simply means we're going to see a shift from an inflow of revenue into the OASDI to a net cash outflow.
Based on a recent report from the SSA, the Trust will have burned through its remaining cash reserves by 2033.
Too many people believe this erroneous Social Security myth
This report -- whose 2033 end date is arguably debatable since the SSA actuaries have their data and predictive models under tight lock and key -- is the primary source of the most pervasive and erroneous myth that involves the Social Security program.
In a Pew Research Center study that was released almost three weeks ago, the research organization asked Americans of varying ages across the country the following question:
When you retire, do you think there will be enough money in the Social Security system to provide benefits at current levels?
Respondents were tasked with answering this question given only the following four responses to choose from:
- Enough money to provide benefits at current levels.
- Enough money to provide benefits, but at reduced levels.
- Not enough money to provide any benefits.
- Don't know.
Overall, just one in five respondents (20%) suggested that the Social Security program would be able to pay benefits commensurate with today's levels when they retire. Another 8% didn't know or refused to answer. This means the bulk of respondents either believe their Social Security benefits will drop when they retire, or worse yet, that there won't be any at all.
The most popular answer in Pew's report was (drumroll) "not enough money to provide any benefits," which 41% of respondents chose.
Why this myth is so wrong
What's wrong with this belief is that Social Security isn't going insolvent, but it will need some form of benefits adjustment if Congress can't figure out a way to fix America's largest social program by 2033. In other words, there will be Social Security benefits for retired workers, their survivors, and the disabled when they're eligible to receive benefits, and the 41% of respondents (especially those under the age of 49) who answered that there won't be benefits available when they eventually retire are almost assuredly wrong.
As it stands now, the OASDI will deplete its cash reserves by 2033. If Congress does nothing, benefits will simply drop by 23% to 77% of the projected full retirement benefit. At this level the Social Security Administration predicts that a 23% reduction in benefit payments will sustain the program for another 54 years. In 2088, the SSA suggests that another drop to 72% of full retirement benefits would be required to keep the program solvent and ensure that eligible retirees and the disabled are getting their benefits.
Although a cut in benefits isn't good news, it's much better than the alternative mode of thinking that Social Security will be insolvent when you retire. It's time we put this myth to rest.
How Social Security could be fixed
Respondents' concerns about a cut in Social Security benefits is a much more viable possibility – especially with Congress' inability to pass legislation in recent years.
Lawmakers have two primary tools at their disposal: they can either increase revenue through taxation, or they can reduce benefits to cut cash outflows from the OASDI. It's a situation where you can't please everyone, because on one hand you have retirees and pre-retirees that could be counting on their Social Security benefits, while on the other there are workers who don't want to pay more in payroll taxes without seeing a commensurate boost in their own benefits.
The most popular of the roughly dozen or so solutions to fix the Social Security program is to boost the payroll tax cap for upper income individuals.
As it stands in 2015, no income beyond $118,500 is subject to the Social Security payroll tax. It means people making far more than $118,500 per year only pay a potentially small percentage of their income into the system, while a majority of Americans are taxed on every dollar they earn. Not surprisingly, the solution that a majority of people chose in an informal poll from The Washington Post was to boost the payroll tax earnings cap. Raising the cap would only affect a small percentage of the population, which is likely to appeal to the low- and middle-income worker.
Unfortunately, this solution by itself would only close the shortfall by about 30%. Chances are that some combination of payroll tax increase and benefit reductions or cost-cuts will be needed to keep the program solvent and avoid a potentially devastating 23% drop in full retirement benefits.
Now that you're in the know, how would you fix the Social Security program?