An assortment of ongoing demographic shifts are working against Social Security
Social Security is our nation's most prized social
program. It provides benefits to more than 64 million people a month, a
majority of whom are retired workers. Of these retirees, 62% lean on their payout for at least half of
their monthly income.
43% OF AMERICANS PLAN TO DELAY
RETIREMENT DUE TO COVID-19
What's more, an analysis from the Center for
Budget and Policy Priorities (CBPP) found that, without Social Security,
elderly poverty rates would be above 40%. For context, aged-American poverty
rates sat around 9% at the time of the CBPP study in 2016.
Half
the country will see a Social Security first next year
Yet, Social Security is also a program that's
in flux, and roughly 165 million Americans are going to see something happen in
2021 that hasn't happened since before they were born.
Every year, the Social Security Board of
Trustees releases a report that examines the short-term (10-year) and long-term
(75-year) outlook for the program. In each of the past 35 years, the Trustees
have cautioned that there wouldn't be enough money collected by Social Security
over the long term to cover the program's outlays. In the most recent report,
this funding obligation shortfall estimate ballooned by $2.9 trillion to
$16.8 trillion.
4 RETIREMENT PLANNING STRATEGIES TO
LEAN ON IN UNCERTAIN TIMES
To be clear, Social Security isn't headed for
bankruptcy, even with this eye-popping funding shortfall projected over the
next 75 years. However, sweeping benefit cuts of up to 24% may await retired
workers by 2035 – when the Trustees estimate Social Security's $2.9
trillion in asset reserves will be depleted – if nothing is done to shore
up the program.
Beginning in 2021, Social Security is expected
to expend more money than it collects. The last time the Social Security
program had a net cash outflow was all the way back in 1982, the year before
the Reagan administration passed the last major bipartisan overhaul. This means
approximately 165 million Americans alive today have never witnessed Social
Security spend more than it collects in a given year.
What's
wrong with Social Security?
The big question you probably have is,
"What went wrong?" In other words, Social Security recently
celebrated its 85th birthday since being signed into law, and it's had minimal
issues up to this point. What changed?
The answer is that we've witnessed an
assortment of ongoing demographic shifts that are working against Social
Security.
HERE'S HOW MUCH MONEY AMERICANS
THINK THEY NEED TO RETIRE COMFORTABLY
A lot of the finger-pointing inevitably gets directed at baby boomers. While the
baby-boom generation's departure from the workforce puts pressure on the
worker-to-beneficiary ratio, simply being born is hardly reason to blame them
for Social Security's eroding financial situation.
One under-the-radar issue that deserves a lot
of blame is growing income inequality. Although Social Security was
designed to provide a financial foundation for low-income elderly workers, the
wealthy appear to be benefiting the most. The well-to-do have few or no
financial constraints when it comes to receiving preventive care, medical
treatments or purchasing prescription medicine. As a result, they're
outliving low-income retirees by a wide margin, while also netting a much
larger monthly benefit.
A significant decline in birth rates may also be at
fault. The Social Security program relies on a steady or growing number of
births each year so that there are enough future workers to offset those
leaving the labor force 20 or more years down the line. Recently, U.S. birth
rates hit an all-time low, which could threaten to reduce the
worker-to-beneficiary ratio.
Even immigration – or the lack thereof – shoulders its
fair share of blame. Just as the program counts on steady birth
rates, it also needs a healthy level of net legal immigration into the U.S.
each year. Since migrants into the U.S. tend to be younger, they'll often spend
decades in the labor force contributing to Social Security via the payroll tax.
But over the last two decades, net legal immigration into the U.S. has been
halved.
This
is Congress' wake-up call
Regardless of what's to blame for Social
Security's imminent cash shortfall, the program's first expected net cash
outflow in nearly four decades should be a wake-up call to lawmakers on Capitol
Hill that time to fix Social Security and strengthen the program for
futures generations is running out.
Interestingly, coming up with solutions to
Social Security's cash shortfall hasn't been an issue. In the past 35 years,
we've seen dozens of policy proposals introduced that would strengthen the
program. These proposals primarily revolve around two core ideas.
For Democrats, the main proposal would
increase the payroll tax earnings cap, which in 2020 sits at $137,700. This means all earned income
(wages and salary) between $0.01 and $137,700 is hit with the 12.4% payroll
tax, while earnings above this amount are exempt. Democratic Party presidential
nominee Joe Biden has proposed creating a doughnut hole between the
tax cap and $400,000 where earnings would remain exempt, but reinstituting the
payroll tax on earnings above $400,000. In other words, it's an increase in
taxation on the top 1% of earners.
WHY THIS IS THE RIGHT AGE TO TAKE
SOCIAL SECURITY
Meanwhile, Republicans favor gradually raising
the full retirement age from its peak of 67 years in
2022 to as high as age 70. Doing so would require future generations of retired
workers (millennials and Generation Z) to wait longer to receive their full
payout, or to accept a steeper reduction to their monthly benefit if taking it
early. No matter their choice, lifetime benefits paid would decline, thereby
saving the program money over the long run.
Individually, both ideas strengthen Social
Security – and as such, neither party is willing to cede an inch to find
common ground.
But individually, these plans are also flawed.
The GOP's plan takes decades before savings are realized, which doesn't resolve
the immediate cash shortfall Social Security is contending with. Meanwhile, the
Democrats' proposal ignores many of the demographic changes discussed earlier
that are hurting Social Security. That is, taxing the rich alone would only buy the program a
few extra decades of time.
A bipartisan solution is what's needed. The question is, how long will it
take before lawmakers realize it?
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