For most Americans, the expectation is to trust Social Security income during retirement. Surveys conducted by national pollster Gallup earlier this year found that 88% of future retirees hope to lean on Social Security earnings, to some degree, to make ends meet. For non-retirees, this represents a record high, dating back two decades of polls.
It is an equally important source of income for current retirees, as data from the Social Security Administration shows that more than 3 in 5 older adults rely on their monthly stipend to represent at least half of their income.
In other words, it is an indispensable program that is solely responsible for keeping more than 22 million people a year out of poverty.
And he’s also in trouble.
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Could a $ 5,800 annual reduction to your Social Security retirement benefit survive?
Each year, the Board of Social Security Trustees publishes a report that examines the short-term (10-year) and long-term (75-year) prospects of the program. For the past 35 years, the managers’ report has warned that long-term revenue collection would be insufficient to cover disbursements. Or, in English, Social Security will not contribute enough money to maintain your current payment level. The program’s $ 2.9 trillion asset reserves are estimated to be fully depleted by 2035.
The good news, if there is anything to be gleaned from this forecast, is that Social Security is not in danger of bankruptcy or insolvency. Two of the three sources of Social Security income – the 12.4% payroll tax on earned income and taxation of benefits – are recurring, meaning that as Americans continue to work, money will always flow. to the program to disburse eligible recipients
However, once Social Security asset reserves are depleted, benefit cuts may be necessary to maintain payments. According to the trustees’ latest report, retired workers and survivors are considering a benefit cut of up to 24% by 2035.
What would this look like for the typical retired worker? By context, the average retired worker was receiving approximately $ 1,503 per month when 2020 began. Assuming cost-of-living adjustments averaged 2% per year through 2035, the typical retired worker would earn $ 2,022.84 per month. If benefit cuts are enacted in 2035 to preserve long-term payments, the average retired worker would lose $ 485.48 a month in income, or $ 5,826 over the course of a year.
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Here’s why Social Security is in big trouble
How does a program that has been paying retired worker benefits without fail for more than eight decades suddenly come to the point where massive benefit cuts are only 15 years (or less) away? The answer lies in a series of ongoing demographic changes.
In addition to the more obvious changes, such as the boom in baby boomers leaving the workforce and increasing longevity, growing income inequality is one of the problems. The wealthy often have few or no financial constraints when it comes to paying for preventive care, medical care, or prescription drugs. The same cannot be said for low-income people. This disparity allows the wealthy to live noticeably longer, and thus cash a larger monthly check for a longer period of time. For several decades, this has weighed on the Social Security program.
Part of the blame can also be assigned to record birth rates. The Social Security program has a constant number of babies born so that the ratio of workers per beneficiary does not decrease when future generations of workers retire. But as millennials wait longer to marry and have children, the worker-beneficiary relationship could be under additional pressure.
Even immigration is an issue, but probably not the way you think. Social Security is based on constant levels of net legal immigration to the United States each year. Most migrants tend to be young, and therefore spend decades in the workforce contributing through the payroll tax. In the past 20 years, net levels of legal immigration have been cut in half, threatening the worker-beneficiary relationship.
And to be clear, illegal immigration is not to blame, and Congress did not steal a penny from Social Security.
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I hope for a solution, but do not have one
You are probably also wondering why lawmakers in Washington, DC have not solved this disaster. There is a double answer to that question.
First, it is not for lack of solutions. Both Democrats and Republicans have a core solution that works to strengthen the program. Rather, the problem it is that both sides have a viable solution and therefore have zero incentives to find common ground with their opposition. In other words, political arrogance is part of the blame.
The second problem is that all Social Security corrections have consequences. No matter which solution is chosen, some group of people will be worse off than before. If the wealthy pay taxes without receiving a proportional increase in retirement benefits, then they are worse. If the retirement age gradually rises, millennials and Generation Z will get fewer lifetime benefits. Because each solution results in the loss of some group of people, politicians are afraid to enact Social Security reform and lose their elected seats.
Historically, lawmakers have acted to save Social Security when it’s in trouble, but they often wait until the 11th hour to do so.
We can certainly expect Congress to come to the rescue of the Social Security program, as it did in the past, but we should not count on that. Instead, the tried and true method of budgeting, saving money, and investing for the future is the best way to minimize our dependency on Social Security income during retirement.
