Social Security income is essential for most retirees. According to a recent survey by Gallup, almost all of the current retirees lean on their monthly Social Security payouts to make ends meet. The program is expected to be a major or minor source of income for most nonretirees.
America's most important social program is in a lot of trouble.
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The inner workings of America's top social program are examined in an annual report by the Social Security Board of Trustees. Since Social Security's inception, it has provided revenue collection and benefit payment data, as well as making predictions about where the program is headed over the next 10 years.
The combined Old- Age and Survivors Insurance Trust and Disability Insurance Trust wouldn't generate enough aggregate revenue to maintain existing payouts, according to the Board of Trustees report. Over the past three decades, the expected cash shortfall has grown on a nominal-dollar basis.
If there is a silver lining to this, it is that Social Security is not at risk of going bankrupt. The Social Security program gets most of its revenue from the payroll tax on earned income. Revenue will always flow into Social Security if Americans continue to work. If you get a Social Security benefit, you'll get some form of payouts.
The Board of Trustees estimates that an up to 23% cut to OASI benefits may be necessary by 2034 to keep payouts going.
By 2034, what will a 23% benefit cut look like? The average retired worker benefit would increase from $1,661/month to $2,107/month by 2034 if the average cost of living increases by 2% annually. I chose a 2% cost-of-living adjustment because the Federal Reserve targets that rate for long-term inflation. The Board of Trustees has projected that the OASI's asset reserves will run out by 2034 and that the average retired worker will lose $5,814 over the course of the year.
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With the combined OASI and DI hitting an all-time record of roughly $2.9 trillion in asset reserves in 2020, you might be wondering how Social Security itself is in such a bind. There are a number of demographic shifts that are hurting the program's revenue generating capacity.
Most people know that baby boomers have been retiring in larger numbers for a long time. There aren't enough new workers to take the place of these people who are retiring. Social Security is strained by the worker-to-beneficiary ratio decline.
You might not know that low birth rates will have the same effect over time. The number of babies born in 2020 was the lowest in over four decades. The U.S. fertility rate hit an all-time low in 2020.
Immigration is a problem for Social Security but not for the reasons you may have heard. The financial well-being of the program depends on the amount of legal immigration into the US each year. Immigrants will spend decades in the labor force contributing to Social Security because they are younger. Legal immigration into the U.S. has been halved over the past 25 years.
It's an issue of income inequality as well. The vast majority of working Americans pay into Social Security. All earned income up to 147,000 is subject to the payroll tax. Earned income over $150,000 is exempt from the payroll tax for the rest of the well-to-do. The earnings are escaping the payroll tax.
Lawmakers aren't the fastest when it comes to fixing Social Security's problems.
In 1983, the program was facing a similar situation to what will happen by 2034 for the OASI and DI Trusts. If lawmakers didn't act, Social Security's asset reserves would be exhausted and benefits would be cut. It took until 1983 for the Reagan administration to pass the final bipartisan reform of the program. History shows that it will be at least a decade before Congress gets to act.
Democrats and Republicans don't have to work with their opponents. Neither party is incentivized to find common ground since they have proposed their own solutions for fixing Social Security.
It's more important than ever to invest for your future, even if you're already retired or entering the labor force for the first time. You don't want to have to place your faith in lawmakers and hope they act quickly to save Social Security.
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