Social Security turned 80 this August, but there isn't much worth celebrating with the program in clear trouble.
Not much worth celebrating
Social Security, the financial backstop designed to protect low-income retirees, the disabled, and survivors of deceased workers, currently covers 59 million Americans (and growing), and will soon be paying far more in benefits than it's receiving via payroll taxes. According to estimates from the Social Security Administration, the Old-Age, Survivors and Disability Insurance Trust (a combination of the Old-Age and Survivors Trust and the Disability Insurance Trust) will use up its remaining cash reserves by 2033.
Why's this happening? Without getting too technical, we're seeing two major demographic shifts. First, people are living longer than ever because of advances in medicine and health education. This means retirees can receive benefits for a longer period of time, thus draining the remaining cash reserves at a quicker pace.
Secondly, baby boomers are retiring in increasing numbers, and there simply aren't enough new workers coming into the labor force to keep the worker-to-beneficiary ratio from falling. As this ratio falls from 2.8-to-1 in 2014 to an estimated 2.1-to-1 by 2040, the cash reserve build for the OASDI Trust will switch to a cash outflow.
Two frightening Social Security statistics
A majority of Americans won't deny that Social Security needs an overhaul -- a recent Gallup survey actually showed that two-thirds of respondents believed the program is in "crisis" or has "major problems" -- but two troubling statistics from two recent surveys demonstrate just how great the need for change is becoming and how little people understand about the program's current issues.
First, Gallup (in the same survey referenced above) asked non-retired respondents whether or not they believed Social Security benefits would be there for them when they retired. Just 51% of the 2,020 adults surveyed believed they would receive benefits from Social Security when they retired. This means basically half (49%) of all respondents expect the program to be completely insolvent upon their retirement.
This statistic is particularly worrying because the program, despite being in trouble, is in no danger of becoming insolvent. If Congress can't come to an amicable solution to raise revenue, cut expenses, or do some combination of the two, benefit payments will simply fall by 23% in 2033 to sustain the program for an additional 54 years. To be clear, no one is exactly thrilled with the idea of a cut in benefits, but Social Security will be there for you when you retire.
Of course, just because Social Security will be there when you retire doesn't mean it's necessarily a good idea to lean too heavily on the program. The Social Security Administration has suggested that Social Security benefits are designed to replace about 40% of a workers' income in retirement. If benefits are indeed cut in 2033 or before, beneficiaries who rely too heavily on the program could find themselves in dire straits.
That leads to the second, and potentially more disturbing Social Security statistic. According to a nearly 1,200-person survey from The Senior Citizens League (TSCL), a whopping 31% of respondents are relying entirely on Social Security for their income. Based on the current beneficiary statistics, this works out to about 19 million people receiving a monthly benefits check averaging $1,220. In other words, 19 million people are living at or below 125% of the federal poverty level.
Incidental to TSCL's findings, the senior-focused research group also discovered that around a quarter of its respondents (mostly, but not exclusively, part of the aforementioned 31%) are also struggling with growing credit card debt. TSCL notes that the inability of elderly individuals to find work means those who rely solely on Social Security for their income are likely forced to put costly medical expenses on their credit cards.
Two solutions for two frightening statistics
These are troubling statistics, and they beg for change, both on a Congressional and individual level.
The first solution to fixing this problem needs to come from our nation's lawmakers. Despite wide differences of political opinion, Congress must come to a solution to generate revenue, cut benefits, or do some combination of both to prevent a 23% benefits cut in 2033.
Last year The Washington Post set up an online survey highlighting a dozen ways (six tax revenue increases and six benefit cuts) that Social Security could be fixed. Those taking the survey were allowed to pick as many solutions as they found to be acceptable. By far the most popular solution to curbing the benefits shortfall from the survey was to raise or lift the Social Security payroll earnings cap.
As it stands in 2015, earnings up to $118,500 are subject to the payroll tax, while any earnings beyond this point are free from Social Security taxation. The argument for raising the earnings cap lies with the idea that the majority of American workers pay taxes on every cent they earn (since most people earn less than $118,500 per year), while upper-income earners only pay taxes on a portion of their annual income. Conversely, upper-income individuals contend that paying more into the system wouldn't be fair since they wouldn't necessarily see an increase in benefits come retirement. The tricky component is that raising the earnings cap alone, or even eliminating it altogether, still won't curb the entirety of the shortfall. In short, the topic of how to fix Social Security is still very much up for debate in Congress.
The other solution involves you, the consumer, taking charge of your finances and minimizing your reliance on Social Security come retirement. Understandably, for those who are already retired this might be difficult, if not impossible. However, for those of you still in the workforce, consider these statistics a wake-up call to save as much as you can and invest for the future. A simple focus on formulating a workable budget and funneling savings from your budget into tax-advantaged long-term retirement accounts, such as a Roth IRA, could be your ticket to minimizing your reliance on Social Security so that it serves as icing on your cake in retirement rather than the entire cake.
Another popular solution inspired by baby boomers is working past what most people consider 'the' retirement age of 65. Keep in mind that you shouldn't count on being able to work into your golden years, as your health or employer may not cooperate. However, if you can work into your golden years it may not be a bad idea, as you'll generate extra income, allowing you to build your savings, and it could allow you to put off claiming your Social Security benefits until age 70, thus maximizing your benefit.