Is Social Security Broken?
America’s dependence on social security probably never been higher. According to the national pollster Gallup, 89% of current retired workers rely on their monthly benefit to make ends meet. Meanwhile, 88% of non-retirees expect to need their Social Security income to meet expenses during retirement.
For more than 80 years, the social security program has provided benefits without fail. But there is growing concern that this financial rock of a program is not here when Gen Y and Gen Z hang up their coats decades later.
This begs the question: is social security going bankrupt?
America’s best social program faces $ 16.8 trillion black hole
Before we answer, let’s take a closer look at some of the numbers and trends that perpetuate the idea that America’s main social agenda is doomed.
Every year for the past eight decades, the Social Security Administrative Council has published a report analyzing the short-term (10 years) and long-term (75 years) prospects of the program. Since 1985, the Trustees have warned that long-term revenue collection will not support spending. In clearer English, the program would face a funding obligation gap.
In the 2020 report, the Board of Directors predicted that the program completely deplete its $ 2.9 trillion in asset reserves by 2035. These asset reserves are the net cash surpluses of Social Security established since its creation. The program has not had an annual net cash outflow since 1982, but the Trustees expect one in 2021 (and annually through 2035).
In addition, the program is faced with a cash deficit estimated at 16.8 trillion dollars between 2035 and 2094. For the context, it is up $ 2.9 trillion from 2019 report and $ 5.7 trillion since 2015. The longer lawmakers wait to fix Social Security’s financial loopholes, the more costly the fix becomes.
Why is social security in such a difficult financial situation?
If you are wondering how such a crucial social program could suddenly find itself in financial distress, know that none of Social Security’s problems are sudden. They were built over time due to a number of demographic changes underway. In no particular order:
- Baby boomers are retiring: Baby boomers have been leaving the workforce for over a decade and will continue to do so for about another 10 years. There are simply not enough new workers to make up for the baby boomers leaving the workforce.
- Longevity increases: Over the past eight decades, the average life expectancy at birth has increased by more than 16 years. At the same time, the full retirement age of Social Security has increased by less than two years. The result is that older people receive payments much longer than originally expected.
- Birth rates fall: The last decade has seen birth rates in the United States fall to an all time high. Couples wait longer to get married, delay having children, and enjoy easier access to contraceptives. Two major recessions in the past 13 years can also make couples think twice about having children.
- Net legal immigration has been halved: Legal immigration is a necessity for a healthy social security program. Legal migrants tend to be young and will often spend decades in the workforce contributing through the payroll tax. Over the past two decades, average annual net legal immigration to the United States has been reduced by almost half.
- Income inequality is on the rise: the discrepancy between the rich and everyone also weighs on social security. Wealthy people generally have no financial constraints to receive medical care and prescription drugs. The same cannot be said of everyone. As a result, the rich are living much longer and pocketing bigger monthly benefit checks.
These trends have been in place for a long time and are directly responsible for the nearly $ 17 trillion in unfunded long-term Social Security obligations.
Relax: Social Security doesn’t go bankrupt
While it’s unfortunate that these demographic shifts won’t stop putting pressure on Social Security anytime soon, there is absolutely no risk of the program going bankrupt or insolvent. The reason has to do with how the program is funded.
Social security generates income in three ways:
- A payroll tax of 12.4% on earned income
- Taxation of benefits beyond certain income thresholds
- Interest income earned on its asset reserves
If the trustees are right and the $ 2.9 trillion in program asset reserves are depleted by 2035, there will be no interest income to collect in less than 15 years. However, the payroll tax on labor income and the taxation of benefits will continue to be collected as long as Americans continue to work. These two recurring revenue streams were responsible for 92% of the $ 1.06 trillion raised in 2019. Unless lawmakers dramatically change how the program is funded, it unable to go bankrupt. Money collected from these recurring income sources can be disbursed to eligible beneficiaries.
However, just because Social Security does not go bankrupt does not mean that there are no potential repercussions from a funding gap of nearly $ 17 trillion. If lawmakers fail to deliver a fix by 2035 or before, service reductions of up to 24% may be necessary for retirees to ensure long-term payments.
In short, Social Security will be there when you retire – but the monthly benefit you receive might be a little lower than expected.