The Blunt, Off-the-Cuff Truth About Social Security

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When talking about the most important social programs in America, there's a really good chance Social Security is at or near the top of the list. Each month, the Social Security Administration pays out approximately $80 billion to eligible beneficiaries, of whom more than two-thirds are retired workers. Of these retirees, 62% rely on Social Security for at least half their monthly income, with 34% leaning on it for 90% to 100% of their income.

However, this vital program, with its guaranteed monthly paycheck, is in trouble, at least according to the 2017 report from the Social Security Board of Trustees. The report outlines an expected cash shortfall of $12.5 trillion (yes, with a "T") between 2034 and 2091, based on the current payout trajectory that takes into account annual cost-of-living adjustments.

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By 2022, Social Security is expected to begin paying out more in benefits than it's generating in revenue, leading to the complete exhaustion of $3 trillion in asset reserves in 2034. Should Congress fail to act, the trustees forecast the need for an across-the-board cut in benefits of up to 23% to maintain solvency. This would push the average survivor and disabled worker benefit below the federal poverty level, and place the average retired worker payout dangerously close to the poverty line.

Harsh truths about Social Security

Truth be told, a number of factors have pushed Social Security to this brink. Some of these factors are well known, such as the ongoing retirement of baby boomers and increased longevity, while others aren't as apparent. Here are five blunt, off-the-cuff Social Security truths you need to hear that adequately describe the mess we're in, and how we are (and aren't) going to get out of it.

1. Income inequality is a bigger issue than you probably realize

Firstly, income inequality is a big problem that's really upending the primary purpose of Social Security. When it was signed into law back in 1935, Social Security was designed to be a financial foundation for low-income workers during retirement. However, a widening gap in earning potential between low- and high-income workers has dramatically tilted the payout scale to favor the rich.

One of the major issues associated with income inequality is access to preventative care. The well-to-do rarely have financial constraints when it comes to getting medical checkups and receiving care. That's not always the case for lower-income individuals and families, who may be shut out of the healthcare system due to their lack of funds.

The result is that wealthy individuals tend to live substantially longer than those who are lower income. Not only do the well-to-do receive a higher monthly payout from Social Security as a result of their earnings history, but they're also able to collect that payout for an extended period of time due to improved longevity, further draining Social Security's coffers.

2. Congress waited too long to act

Go ahead and blame Congress -- it deserves it. Lawmakers, who are elected to serve the interests of their constituents, have sat on their hands for more than three decades and done virtually nothing to improve Social Security's long-term outlook (i.e., by generating new revenue or reducing long-term expenditures). Frankly, I believe they've waited too long to make any solution painless at this point.

As of 2017, the trustees' report estimated a long-term (75-year) actuarial deficit of 2.83% for Social Security. In plainer English, this means the current 12.4% payroll tax on earned income up to $128,400 as of 2018 would have to rise by 2.83% to 15.23% in order to offset the expected cash shortage between now and 2091. The longer Congress waits to act, the bigger this actuarial deficit grows, and therefore the more drastic the changes need to be to fix Social Security.

The simple fact that Democrats and Republicans can't agree on anything when it comes to Social Security is crushing this program's potential.

3. The rich should pay more, even if it's unfair

One of the most highly touted solutions by Democrats, and the one the public favors the most in polls by a significant margin, is the idea of raising or eliminating the maximum taxable earnings cap. This is the $128,400 figure alluded to in the point above.

As of 2018, all earned income up to $128,400 is subject to Social Security's payroll tax -- but any income above and beyond this point is exempt. Democrats want to change that. They want higher-income workers who earn more than $128,400 to pay into Social Security on some or all of those earnings. It's been estimated that completely eliminating the cap and taxing all earned income, which would wind up impacting fewer than 10% of today's workers, would completely erase the long-term deficit in Social Security.

The problem? Social Security capped the maximum monthly payout at full retirement age at $2,788 in 2018. So taxing millionaires at 12.4% wouldn't result in these folks seeing one extra cent in retirement income from Social Security, aside from annual cost-of-living adjustments. That's not exactly fair.

Then again, it's not like the well-to-do are reliant on Social Security. A majority of high-income workers will either lean on Social Security to some small degree, or not at all. This makes the wealthy the perfect group to pay more tax into the program.

4. Longevity should be adjusted or indexed, despite being unfair to many of today's working Americans

However, the Republicans have a very good idea of their own: raising the full retirement age.

Your full retirement age is the age at which the Social Security Administration deems you eligible to receive 100% of your retirement benefit, based on your work and earnings history. Over a 40-year stretch (1983-2022), the full retirement age will have risen by just two years, from 65 to 67. Yet, longevity will have more than doubled the increase in the full retirement age over this time span. Increased longevity has become a huge problem for Social Security, which was designed with 1930s life expectancies in mind. What had once been a program that was expected to provide benefits for a few years, now carries the average 65-year-old for two decades!

The GOP plan would see that the full retirement age is increased gradually to 68, 69, or even 70. In doing so, it would require workers to wait even longer to receive 100% of their full retirement benefit, or as an alternative, claim benefits early and accept an even steeper permanent reduction in their monthly payout. Either way, lifetime benefits paid out to future beneficiaries would be reduced.

The downside? It's a fancy way of cutting the lifetime benefits paid out to millennials and Generation Z. But do I think longevity should be indexed or adjusted? Absolutely, otherwise the number of seniors reliant on Social Security for 20 to 30 years will keep growing.

5. Expanding benefits isn't realistic

Finally -- and this is as blunt as it gets -- expanding benefits simply isn't realistic at this time. Though there have been a number of Social Security proposals put on the table by lawmakers in recent years that would expand payouts to seniors by replacing the current measure of inflation with a new one geared for the elderly, or provide added benefits to widow(er)s and children, these simply aren't realistic with the program facing a $12.5 trillion cash shortfall.

Don't get me wrong -- I'm not against the idea of expanding benefits. In fact, it's a near certainty that seniors aren't having the inflation they face accurately represented in annual cost-of-living adjustments, and a fix to this would certainly make sense. I'm merely against the possibility of expanding benefits given the current financial picture of the Social Security program. In other words, even if the rich were taxed or the GOP were able to raise the full retirement age to 70, all that would do is eliminate the long-term cash shortfall and keep the current payout trajectory as an option. It doesn't offer a pathway to further expand benefits above and beyond the current trajectory. Any attempts to do so now would only drain the coffers of Social Security even quicker than estimated.

Lawmakers need to stop trying to reinvent the wheel with Social Security and stick to the basics of raising new revenue, cutting long-term expenditures, and ensuring that the primary goals of Social Security remain intact. The longer they wait, the more painful that solution becomes.

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