Sean
Williams (TMFUltraLong) Jul 26, 2020 at 6:06AM Author Bio
For most Americans, relying on Social Security
income during retirement is the expectation. Surveys conducted by national
pollster Gallup earlier this year found that 88% of future retirees expect to
lean on Social Security income, to some degree, to make ends meet. For
nonretirees, this represents an all-time high, dating back through two decades
of surveys.
It's an equally important source of income for
current retirees, with Social Security Administration data showing that better
than 3 in 5 seniors leans on their monthly stipend to account for at least half
of their income.
In other words, it's an indispensable program
that's singlehandedly responsible for keeping more than 22 million people a year out of poverty.
And it's also in trouble.
Could you survive a
$5,800 annual reduction to your Social Security retirement benefit?
Every year, the Social Security Board of
Trustees releases a report that examines the program's short-term (10-year) and
long-term (75-year) outlook. For the past 35 years, the trustees' report has
cautioned that long-term revenue collection would be insufficient to cover
outlays. Or, in English, Social Security won't bring in enough money to sustain
its current payout level. It's been estimated that the program's $2.9 trillion
in asset reserves will be completely exhausted by 2035.
The good news, if there's any to be plucked
from this forecast, is that Social Security is in no danger of going
bankrupt or becoming insolvent. Two of Social Security's three sources of
revenue -- the 12.4% payroll tax on earned income and the taxation of benefits
-- are recurring, which means that as along as Americans keep working, money
will always be flowing into the program for disbursement to eligible
recipients.
However, once Social Security's asset reserves
are depleted, sweeping benefit cuts may be needed to sustain payouts. Based on
the latest trustees' report, retired workers and survivors are looking at
an up to 24% benefit cut by 2035.
What would this actually look like for the
typical retired worker? For context, the average retired worker was receiving
approximately $1,503 a month when 2020 began. Assuming cost-of-living
adjustments averaged 2% a year through 2035, the typical retired worker would
net $2,022.84 a month. If benefit cuts are enacted in 2035 to preserve payouts
for the long-term, the average retired worker would lose $485.48 a month in
income, or $5,826 over the course of a year.
Here's why Social
Security finds itself in big trouble
How does a program that's been paying retired
worker benefits without fail for more than eight decades suddenly get to the
point where massive benefit cuts are just 15 years (or less) away? The answer
lies with a number of ongoing demographic changes.
Aside from the most obvious changes, such as
baby boomers leaving the work force and longevity increasing, growing income inequality is one issue to
blame. The wealthy often have little or no financial constraints when it comes
to paying for preventative care, medical care, or prescription medicines. The
same cannot be said for low-income folks. This disparity allows the rich to
live notably longer, and thereby collect a bigger monthly check for a longer
period of time. Over multiple decades, this has weighed on the Social Security
program.
Some blame can also be assigned to record-low birth rates. The Social Security
program counts on a steady number babies being born so that the
worker-to-beneficiary ratio won't fall when future generations of workers
retire. But with millennials waiting longer to get married and have children,
the worker-to-beneficiary ratio could be under added pressure.
Even immigration is a problem -- but
probably not in the way you're thinking. Social Security relies on steady
levels of net legal immigration into the U.S. every year. Most migrants tend to
be young, and therefore spend decades in the labor force contributing via the
payroll tax. Over the past 20 years, net legal immigration levels have been
halved, which threatens the worker-to-beneficiary ratio.
And just to be clear, illegal immigration isn't
to blame, and Congress didn't steal a dime from Social Security.
Hope for a fix, but
don't count on one
You're probably also wondering why lawmakers
in Washington, D.C., haven't fixed this mess. There's a twofold answer to that
question.
First, it's not for a lack of solutions.
Both Democrats and Republicans have a core solution that
works to strengthen the program. Rather, the issue is that
both parties have a workable solution, and therefore have zero incentive to
find common ground with their opposition. In other words, political hubris is
part of the blame.
The second problem is that all Social Security fixes have consequences.
No matter what fix is chosen, some group of people will be worse off than they
were before. If the wealthy are taxed without receiving a commensurate increase
in retirement benefits, then they're worse off. If the full retirement age is
gradually raised, then millennials and generation Z will net less in lifetime
benefits. Because every solution results in some group of people losing out,
politicians are afraid of enacting Social Security reform and losing their
elected seats.
Historically, lawmakers do act to save Social
Security when it's in trouble, but they often wait until the 11th hour to do
so.
We can certainly hope that Congress comes to
the rescue of the Social Security program, as it's done in the past, but we
shouldn't count on it. Instead, the tried-and-true method of budgeting, saving
money, and investing for the future, is going to the best
way to minimize our reliance on Social Security income during retirement.
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