The monthly benefits most retirees receive from Social Security are vital to their financial well-being. For the last 22 years, national pollster Gallup has surveyed retired workers to gauge how reliant they are on the Social Security income they receive. Over these two-plus decades, between 80% and 90% of respondents have consistently noted that it's a "major" or "minor" income source, and therefore needed to make ends meet.
Unfortunately, this foundational social program finds itself on ever-shakier financial ground, and current/future beneficiaries are the ones who could pay the price.
Image source: Getty Images.
Sweeping Social Security benefit cuts may be less than a decade away
Every year since the first retired-worker benefit was mailed out in January 1940, the Social Security Board of Trustees has released a report that extensively details the revenue and spending of America's top retirement program in the previous year. Perhaps more importantly, the annual Trustees Report estimates the impact of fiscal and monetary policy, along with prevailing demographic changes, to determine how financially "healthy" Social Security will be over the short term (10 years following the release of a report) and long term (75 years after the release of a report).
Beginning in 1985, the Trustees began pointing to an estimated long-term funding obligation shortfall. In other words, forecast revenue collection in the 75 years following the release of a report was expected to be insufficient to cover outlays. These are predominantly benefit payments but also include nominal administrative expenses to operate Social Security.
Recently, the 2024 Social Security Board of Trustees Report pointed to yet another widening of the program's cash shortfall. Through 2098, Social Security is estimated to be short of its funding needs by $22.6 trillion, which is $200 billion greater than what was forecast in the previous report.
I want to be crystal clear that this funding obligation shortfall in no way means Social Security is bankrupt or insolvent. Based on how the program is currently funded (95% of revenue comes from payroll taxes and the taxation of benefits), it mathematically can't go bankrupt or become insolvent.
However, there's the very real possibility that the existing payout schedule, including the cost-of-living adjustments (COLAs), won't be sustained much longer.
The more immediate concern for current and future beneficiaries is that the Old-Age and Survivors Insurance Trust Fund (OASI), which is responsible for making payments to over 50 million retired workers and roughly 5.8 million survivor beneficiaries each month, could exhaust its asset reserves by 2033. If this excess capital built up since inception is completely depleted, sweeping benefit cuts of up to 21% may be needed to sustain payouts through 2098 without the need for any further reductions.
In simple English, retired-worker beneficiaries and survivors receiving benefits could be just nine years from a major haircut to their monthly Social Security income.
The OASI's asset reserves are projected to be depleted by 2033. U.S. Old-Age and Survivors Insurance Trust Fund Assets at End of Year data by YCharts.
Social Security's shortcomings may not be what you think they are
When things go wrong with a vitally important program like Social Security, the finger-pointing immediately turns to our elected officials in Washington, D.C. While they indeed deserve their fair share of the blame for this mess, the reasons behind Social Security's $22.6 trillion (and growing) funding shortfall may not be what you think.
On social media message boards, it's common to see claims made that "Congress stole from Social Security," or "benefits shouldn't be given to undocumented workers." The problem is that both of these scapegoat claims are categorically false.
Every cent of Social Security's trust funds is accounted for, and the program is receiving interest on what's been invested in special-issue government bonds, as required by law. In fact, the Social Security Administration publicly updates its investment portfolio on a monthly basis.
Meanwhile, traditional Social Security (i.e., retired-worker benefits, survivor benefits, and payouts to disabled workers) doesn't provide a dime in benefits to undocumented workers. People sometimes conflate Supplemental Security Income (SSI) and Social Security, which leads to this misunderstanding. While SSI can provide income to asylum seekers and is funded by the General Fund, traditional Social Security doesn't provide benefits to asylum seekers and is funded by payroll taxation, the taxation of benefits, and the interest earned on its special-issue government bonds.
Actually, Social Security's shortcomings can be explained by an assortment of ongoing demographic shifts. These include:
- The steady retirement of baby boomers from the labor force, which is lowering the worker-to-beneficiary ratio.
- An approximate 13-year increase in life expectancy since the first retired-worker benefit was mailed out in 1940.
- A nearly 58% decline in net legal migration into the U.S. since 1998. Social Security counts on younger migrants entering the country and contributing via the payroll tax for decades.
- A historically low U.S. birth rate, which threatens to further reduce the worker-to-beneficiary ratio.
- Rising income inequality, which has allowed more wages and salary to "escape" the payroll tax than ever before.
In addition to these demographic changes, congressional inaction has played a role. The longer our elected officials wait to tackle Social Security's unfunded obligation deficit, the costlier it's going to be on working Americans and/or retirees.
Image source: Getty Images.
This is a good news/bad news scenario for current and future retirees
If there's a silver lining here, it's that lawmakers have been in this situation before and have yet to fail the American public. In 1983, with Social Security's asset reserves running on fumes, a bipartisan Congress passed, and then-President Ronald Reagan signed, the Social Security Amendments of 1983 into law.
The Amendments of 1983 gradually increased payroll taxation on workers, provided for a gradual lift to the full retirement age over multiple decades, and introduced the now-hated taxation of benefits above preset provisional income thresholds. Congress has a history of strengthening Social Security in the proverbial 11th hour.
Furthermore, current and future beneficiaries don't have to worry about Social Security disappearing. As noted, the program generates the bulk of its revenue from taxing earned income and, to a far lesser extent, taxing benefits. Even if the OASI's asset reserves were to be depleted, there'd be more-than-enough revenue coming in to continue disbursing benefits to eligible retired workers -- albeit at a reduced rate.
The bad news for retirees is that lawmakers on Capitol Hill are nowhere close to agreeing on a solution to strengthen Social Security.
Though you can read about party-specific solutions in greater detail, the dilemma is that the Democratic and Republican approaches to "fix" Social Security are both effective. Therefore, neither party has an incentive to find common ground with their opposition.
But herein lies the problem: Each party's respective solution comes up short. For example, the Republican proposal to gradually raise the full retirement age and reduce long-term outlays would take decades to yield meaningful cost savings. This does nothing to stem the OASI asset reserve depletion date that's now just a projected nine years away.
On the other hand, the Democratic party plan to reinstate payroll taxation on high earners would push out the asset reserve depletion date for the OASI. By itself, however, it comes nowhere close to covering the estimated $22.6 trillion long-term funding obligation shortfall. In fact, President Joe Biden's four-point Social Security plan would only extend the solvency of the trust funds by about five years, based on a study from think tank Urban Institute.
Strengthening Social Security has always required bipartisan cooperation. We're nowhere close to that happening right now.
