165 million Americans will witness a Social Security first in 2021

An assortment of ongoing demographic shifts are working against Social Security

Social Security is our nation's most prized social program. It provides benefits to more than 64 million people a month, a majority of whom are retired workers. Of these retirees, 62% lean on their payout for at least half of their monthly income.

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What's more, an analysis from the Center for Budget and Policy Priorities (CBPP) found that, without Social Security, elderly poverty rates would be above 40%. For context, aged-American poverty rates sat around 9% at the time of the CBPP study in 2016.

Half the country will see a Social Security first next year

Yet, Social Security is also a program that's in flux, and roughly 165 million Americans are going to see something happen in 2021 that hasn't happened since before they were born.

Every year, the Social Security Board of Trustees releases a report that examines the short-term (10-year) and long-term (75-year) outlook for the program. In each of the past 35 years, the Trustees have cautioned that there wouldn't be enough money collected by Social Security over the long term to cover the program's outlays. In the most recent report, this funding obligation shortfall estimate ballooned by $2.9 trillion to $16.8 trillion.

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To be clear, Social Security isn't headed for bankruptcy, even with this eye-popping funding shortfall projected over the next 75 years. However, sweeping benefit cuts of up to 24% may await retired workers by 2035 – when the Trustees estimate Social Security's $2.9 trillion in asset reserves will be depleted – if nothing is done to shore up the program.

Beginning in 2021, Social Security is expected to expend more money than it collects. The last time the Social Security program had a net cash outflow was all the way back in 1982, the year before the Reagan administration passed the last major bipartisan overhaul. This means approximately 165 million Americans alive today have never witnessed Social Security spend more than it collects in a given year.

What's wrong with Social Security?

The big question you probably have is, "What went wrong?" In other words, Social Security recently celebrated its 85th birthday since being signed into law, and it's had minimal issues up to this point. What changed?

The answer is that we've witnessed an assortment of ongoing demographic shifts that are working against Social Security.

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A lot of the finger-pointing inevitably gets directed at baby boomers. While the baby-boom generation's departure from the workforce puts pressure on the worker-to-beneficiary ratio, simply being born is hardly reason to blame them for Social Security's eroding financial situation.

One under-the-radar issue that deserves a lot of blame is growing income inequality. Although Social Security was designed to provide a financial foundation for low-income elderly workers, the wealthy appear to be benefiting the most. The well-to-do have few or no financial constraints when it comes to receiving preventive care, medical treatments or purchasing prescription medicine. As a result, they're outliving low-income retirees by a wide margin, while also netting a much larger monthly benefit.

significant decline in birth rates may also be at fault. The Social Security program relies on a steady or growing number of births each year so that there are enough future workers to offset those leaving the labor force 20 or more years down the line. Recently, U.S. birth rates hit an all-time low, which could threaten to reduce the worker-to-beneficiary ratio.

Even immigration – or the lack thereof – shoulders its fair share of blame. Just as the program counts on steady birth rates, it also needs a healthy level of net legal immigration into the U.S. each year. Since migrants into the U.S. tend to be younger, they'll often spend decades in the labor force contributing to Social Security via the payroll tax. But over the last two decades, net legal immigration into the U.S. has been halved.

This is Congress' wake-up call

Regardless of what's to blame for Social Security's imminent cash shortfall, the program's first expected net cash outflow in nearly four decades should be a wake-up call to lawmakers on Capitol Hill that time to fix Social Security and strengthen the program for futures generations is running out.

Interestingly, coming up with solutions to Social Security's cash shortfall hasn't been an issue. In the past 35 years, we've seen dozens of policy proposals introduced that would strengthen the program. These proposals primarily revolve around two core ideas.

For Democrats, the main proposal would increase the payroll tax earnings cap, which in 2020 sits at $137,700. This means all earned income (wages and salary) between $0.01 and $137,700 is hit with the 12.4% payroll tax, while earnings above this amount are exempt. Democratic Party presidential nominee Joe Biden has proposed creating a doughnut hole between the tax cap and $400,000 where earnings would remain exempt, but reinstituting the payroll tax on earnings above $400,000. In other words, it's an increase in taxation on the top 1% of earners.

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Meanwhile, Republicans favor gradually raising the full retirement age from its peak of 67 years in 2022 to as high as age 70. Doing so would require future generations of retired workers (millennials and Generation Z) to wait longer to receive their full payout, or to accept a steeper reduction to their monthly benefit if taking it early. No matter their choice, lifetime benefits paid would decline, thereby saving the program money over the long run.

Individually, both ideas strengthen Social Security – and as such, neither party is willing to cede an inch to find common ground.

But individually, these plans are also flawed. The GOP's plan takes decades before savings are realized, which doesn't resolve the immediate cash shortfall Social Security is contending with. Meanwhile, the Democrats' proposal ignores many of the demographic changes discussed earlier that are hurting Social Security. That is, taxing the rich alone would only buy the program a few extra decades of time.

bipartisan solution is what's needed. The question is, how long will it take before lawmakers realize it?

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