For better or worse, Social Security sits atop the pecking order as our nation's most important social program. Each month, the Social Security Administration sends out more than 63 million benefit checks, 70% of which head to retired workers. Of these retirees, more than 15 million are pulled above the federal poverty line as a result of this monthly payout, while a total of 62% generate at least half their income from Social Security.
Social Security has been a financial rock for retirees for a long time
But what you may not realize is that Social Security has been doing this (i.e., providing a financial foundation for elderly Americans) for a really long time. The Social Security Act was signed into law by President Franklin D. Roosevelt all the way back in August 1935, with its primary goal of providing financial protection for older Americans who could no longer earn a wage after decades of employment. The first benefit check went out on Jan. 1, 1940.
This upcoming August, Social Security will be celebrating its 84th birthday after hitting numerous milestones along the way. Last year, for instance, the program collected more than $1 trillion in revenue for the first time in history. It also spent more than $1 trillion for the first time ever as well, if you include Railroad Retirement Exchange benefits and administrative costs to run the program.
Additionally, Social Security continued a more than three-decade-old streak in 2018 of producing a net-cash surplus by year's end. The $3.1 billion surplus in 2018 pushed Social Security's asset reserves to an all-time end-of-year high of $2.9 trillion.
While this all probably sounds great, worrisome news lurks on the horizon. A number of ongoing demographic changes, such as the retirement of baby boomers, increased longevity, lower birth rates, and growing income inequality, to name a few, are set to wreak havoc on our nation's top social program, beginning in 2020.
Social Security's 100th anniversary may mark an ominous event
According to the April-released Social Security Board of Trustees report, the program is expected to expend more than it collects in 2020, which would be the first time that's happened since 1982. Barring amendments to the program by lawmakers in Washington that increase revenue collection, reduce expenditures, or enact some combination of the two, the trustees foresee this net-cash outflow growing with each passing year.
Based on projections from the trustees, by the time Social Security's 100th anniversary rolls around in 2035, there won't be much worth celebrating. That's because, per the report, Social Security's $2.9 trillion in asset reserves will be completely exhausted by sometime in 2035.
The silver lining here for seniors, among this horrible news, is that Social Security doesn't need a dime in its asset reserves to remain solvent. It collected $885 billion in revenue last year from the 12.4% payroll tax, and another $35 billion from the taxation of Social Security benefits. This shows that as long as the American public keeps working, and Congress doesn't change how the program is funded, it's incapable of going bankrupt. If you've qualified for a Social Security benefit, you will be getting one when you retire.
The issue, though, is that the forecasted depletion of Social Security's asset reserves signifies that its existing payout schedule isn't sustainable. The trustees report implies that an across-the-board benefits cut of up to 23% may be headed retired workers' way by 2035 to sustain payouts through 2093 if additional revenue isn't collected and/or expenditure cuts made.
Solutions aplenty, with no means of gaining consensus
Arguably, one of the most frustrating aspects of Social Security's imminent cash crunch -- a $13.9 trillion cash shortfall between 2035 and 2093, based on the current payout trajectory -- is that solutions to the problem exist. In fact, there have been an abundance of proposals over the past decade from both political parties that would remedy Social Security's projected cash shortfall. But because neither party is willing to give an inch in terms of meeting their opposition in the middle, no proposal has been able to muster the 60 votes in the Senate required to amend Social Security.
Democrats on Capitol Hill predominantly favor the idea of raising additional revenue to tackle the shortfall. This would be done by raising, or entirely removing, the earnings cap associated with Social Security's workhorse, the payroll tax.
In 2019, all earned income (wages and salary) between $0.01 and $132,900 is subject to the 12.4% payroll tax, with all earned income above this amount exempt. In 2016, some $1.2 trillion in earnings was above the cap, and thereby exempted. Democrats want put an end to, or minimize, this loophole by raising or eliminating the cap. In doing so, the wealthy would be required to pay more into the system, providing an immediate influx of new revenue into the program.
Meanwhile, Republicans prefer gradually increasing the full retirement age, which is the age at which the Social Security Administration deems you eligible to receive 100% of your monthly payout. Currently set to peak at age 67 in 2022 for those folks born in 1960 or later, some members of the GOP have called for a gradual increase in the full retirement age to 70.
Since 1935, and through 2022, the full retirement age will have increased by just two years (from age 65 to 67), while life expectancies have gone up by nine years just since 1960. The average 65-year-old today is living about 20 more years, thereby drawing a payout from a program that was crafted to protect the elderly for years, not multiple decades. Increasing the full retirement age wouldn't impact current and soon-to-be retirees, but it would require future generations of workers to either wait longer to collect their full monthly payout, or to accept a steeper permanent reduction each month if claiming early. Either way, it would reduce lifetime benefit payouts, thereby saving Social Security money.
Put plainly, Democrats won't support a platform whereby benefits are reduced. Conversely, Republicans won't support the idea of having the wealthy pay more. This stalemate is what's really costing Americans, because the longer Congress waits to resolve this mess, the costlier the fix will be on working Americans.
If lawmakers don't begin addressing Social Security's cash shortfall soon, the program's 100th anniversary could mark its darkest days in existence.
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