This has been a challenging year in many ways for the American public. The COVID-19 pandemic has completely changed the way we interact with each other, and has displaced more than 20 million workers. If you are an investor, you were also taken on a wild ride, with the stock market packing around 10 years of volatility in a four month period. And don’t even make me talk about the hornets of the murder.
But one of the few solace that working Americans have always been able to take is the idea that if they get 40 lifetime work credits, a Social Security benefit will be waiting for them when they retire.
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The Social Security program has navigated through 13 recessions before the COVID-19 pandemic. Despite some obviously bleak prospects during those previous recessions, you’ll notice that Social Security is still here, and has been paying ongoing benefits for retired workers for more than 80 years. That is why it is often referred to as the most successful social program in America.
But just because it’s been a historically successful program doesn’t mean it’s necessarily in good shape to serve future generations of retirees.
Social Security faces a financing gap of almost $ 17 billion
Since 1985, the report of the Social Security Board of Trustees released annually, examining the short-term (10-year) and long-term (75-year) prospects for the program, has warned that long-term revenue collection would be insufficient to cover expenses. In other words, Social Security would not bring enough money to cover the estimated payments to all beneficiaries in the next 75 years. According to the 2020 report, the program’s unfunded obligations have now increased to $ 16.8 trillion (yes, with a “t”).
How did this happen? Let me assure you that baby boomers simply being born (and now retiring) is not the only factor. More than half a dozen factors have influenced the growing deficit of Social Security funds, including increased longevity, lower birth rates, lower levels of net legal immigration, and even income inequality.
If lawmakers fail to address this funding gap soon, the Trustees have estimated that the program will fully deplete its $ 2.9 trillion in asset reserves (that is, accumulated net cash surpluses since inception) by 2035. What happens then it is often a point of great benefit. containment.
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The average retired worker benefit could be reduced by more than $ 4,300 in less than 15 years.
The good news, if there is a silver lining for the elderly and future retirees, is that Social Security will not be bankrupt, even if Congress does not act. Two of the three sources of Social Security funding, the 12.4% payroll tax on earned income and the taxation of benefits, are recurring sources of income. As the American public continues to work, the money will go into the Social Security program for disbursement to eligible beneficiaries.
On the other hand, no money left in asset reserves would mean that the existing payment schedule, including cost of living adjustments, would no longer be sustainable. Translation: benefit cuts would be necessary to maintain Social Security solvency in the coming decades.
According to the Trustees’ latest report, the Old Age and Survivors Insurance Trust could only pay 76% of scheduled benefits once their coffers are cleaned. Put another way, it means that retired workers and survivors could face an overall benefit cut of 24% by 2035.
Now, think about this for a moment. In May 2020, the Social Security Administration released data showing that the average retired worker brought home $ 1,512.63 per month. That’s $ 18,151.56 a year for the typical retiree. A 24% cut in benefits would equal, in May 2020 dollars, a cut in benefits of $ 4,356 a year. That’s scary when you consider that 62% of retired workers depend on their monthly payments to represent at least half of their income.
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What are the options to strengthen Social Security?
At this point, all ideas are on the table to resolve the Social Security funding gap. But the key is that a Social Security solution involves increasing additional income, reducing expenses, or instituting some combination of the two.
Most Democrats in Congress are in favor of increasing additional income to address the Social Security cash problem. This would be accomplished by increasing or eliminating the payroll tax limit associated with the 12.4% payroll tax on earned income. In 2020, all wages and salaries of up to $ 137,700 are subject to payroll tax, while earnings above this level are exempt. Raising or removing the limit would require higher-income workers to pay more in the program. For a further context, the amount of earnings exempt from payroll tax has skyrocketed from the north of $ 300 billion in 1983 to $ 1.2 billion in 2016.
As for Republican lawmakers, most prefer the idea of reducing long-term outlays to strengthen Social Security. This would be accomplished by gradually increasing the full retirement age from its maximum expected peak of 67 years in 2022 to the age of 70. In doing so, future generations of retirees would have to choose between waiting longer to get their full monthly payment and accepting a steeper monthly reduction for claiming early. Regardless of your choice, lifetime benefits paid will decrease for future generations of retired workers.
There is a third option by which Democrats and Republicans work together on a bipartisan solution, which in my opinion would be the most optimal solution for Social Security.
The problem is that Democrats and Republicans have a solution that they think works, and therefore have been unwilling to find common ground with their opposition. This battle of political arrogance is putting Social Security in a precarious position, and the longer Congress waits to act, the more painful the solution will be for American workers.
If lawmakers don’t act soon, current and future beneficiaries may be forced to prepare for the reality of losing thousands of dollars in annual income to maintain Social Security solvency.
