Social Security Is Doing Something It Hasn't Done Since 1982

The most important social program in this country is Social Security. According to the Center on Budget and Policy Priorities, 21.7 million Americans are lifted out of poverty every year because of Social Security.

The vast majority of Americans will lean on it during retirement. According to a survey by Gallup, 85% of nonretirees think Social Security is a major or minor source of income in their golden years.

For as long as Social Security has existed, it has had its own set of financial concerns.

Social Security hasn't done this in four decades

Social Security's balance sheet is published annually, just as investors can review a publicly traded company's income statement and balance sheet to get an idea of how much revenue a company is bringing in and where those dollars are going from a cost perspective.

Every year, the Social Security Board of Trustees releases a lengthy report that examines every facet of the program. This includes complete data on how much revenue Social Security generated from its three income sources, as well as how many of those dollars were funneled into payments and administrative costs.

The Social Security Amendments of 1983 were passed by Congress and signed into law by President Ronald Reagan. Social Security has brought in more revenue than it has earned in the past. Between 1982 and 2020 the Social Security asset reserves ballooned from $25 billion to $2.91 trillion.

The trend has changed. The Social Security Administration updates its investment holdings on a monthly basis even though the Board of Trustees report won't be published for at least a few more months. The law requires the asset reserves to be invested in U.S. Treasury bonds. Between the end of December 2020 and the end of December 2021, the total investments held by Social Security declined. It was the first cash outflow for Social Security since 1982.

These outflows are going to get worse. The Board of Trustees believes that the cash outflow will shrink the program's asset reserves to just over $1 trillion by the year 2030.

Social Security has a laundry list of shortcomings

You might be wondering how a successful social program can be turned on its head. There is a long list of demographic shifts.

Baby boomers have retired from the workforce for a decade. The exit from the labor force has been weighing down the ratio. There isn't enough new workers in the labor force to offset the retirements.

We are also living longer, which is a bit of a dilemma for Social Security. While living longer is a positive in that we get to spend more time with our family and friends, it is a strain on a program which wasn't designed to pay retired workers for multiple decades. The average life expectancy in the U.S. has increased by 11 years.

Birthrates in the US plummeted to a record low in 2020 as life expectancy crept up. Birthrates have fallen because of everything from waiting longer to get married and easier access to contraceptives to higher economic costs.

Immigration is an issue, but not in the sense you might be thinking. Legal immigration into the U.S. is needed to bolster long-term payroll tax collection. Most legal immigrants will spend decades in the labor force before collecting a retirement benefit of their own. Net legal immigration into the U.S. has halved over the past 25 years.

Income inequality is a reason for Social Security's problems. The lion's share of revenue collected by Social Security is accounted for by the 12.4% payroll on earned income. The payroll tax has a cap of 147,000.

The program will be paid for by the 94% of working Americans earning less than $150,000 annually. The remaining 6% will not owe any payroll tax over 147,000 in earned income. According to the Social Security Administration, earned income escaped taxation due to the cap. This figure is higher as of 2022.

Things are going to get worse before they get better

The scariest aspect of Social Security is that it will get worse before it gets better.

Lawmakers in Congress are aware of the many flaws in Social Security. Over the past decade, dozens of proposals and bills have been offered on Capitol Hill. The two parties in Washington are not close to an agreement on how to fix Social Security. Neither party has been willing to compromise or find common ground with their opponent because they believe they have the better solution.

Legislators wait until the 11th hour to resolve issues with Social Security. The Amendments of 1983 received bipartisan support. The changes were made because the program was less than a year from exhausting its asset reserves. Social Security will exhaust its collective asset reserves by 2034 according to the Board of Trustees Report.

The longer Congress waits to act, the more expensive Social Security will be. The well-to-do and average working American may eventually face a hefty increase in their payroll tax obligation to right Social Security.