For most of our working lives, Social Security is but a future promise, represented by the cryptic initials of FICA and OASDI. Social Security has long been the “third rail” of American politics, but in recent years, the narrative that the Social Security system is going bankrupt has also become a tactic for politicians to mobilize their base of supporters.
With waves of the baby boomer generation entering retirement year after year, questions and concerns abound, namely: Is Social Security financially healthy and will it still be there for me when I need it?
The Social Security system has endured periodic scares over the years that have inevitably left many to wonder if the trust fund will be around long enough to pay the benefits they were promised. Since its creation in 1935, there have been three fundamental developments that have led to some of the present day challenges the Social Security system faces today:
- First and foremost, advances in medical technology coupled with healthier lifestyle choices means retirees are living longer.
- The number of workers paying into the system (which supports payment of benefits to current recipients) has fallen from just over 8 workers for every retiree in 1955 to just under 3 in 2021. This ratio is expected to fall further, to just over 2 workers for every retiree, by 2038.
- In its original form, Social Security was simply designed to provide income support to older Americans who had little to no other resources. Over time, the program was expanded to provide income support to disabled workers and surviving family members, but these added obligations were not always matched with the necessary funding levels to ensure their ongoing financial viability.
The most recent annual report from the trustees of the Social Security system suggests the trust fund reserves are projected to be depleted by 2035, meaning the income from Social Security taxes (FICA and OASDI) would only cover 83% of current obligations. In other words, current recipients would be faced with a reduction in their benefits of 17 cents on the dollar.
But according to the Center on Budget and Policy Priorities, Social Security benefits represent 75% or more of total income for more than half of all retirees, and four out of 10 seniors would fall below the poverty line without benefits, so it’s difficult to see how any politician would allow the collapse of the trust fund to occur on their watch.
While this all sounds dire, there are a number of solutions available to shore up the trust fund and provide financial solvency long into the future:
- Increase Payroll Taxes: Further increases in payroll taxes, depending on the size, could add years of life to the trust fund.
- Raise the Retirement Age: This has already been done in past reforms and would save money by paying benefits to future recipients at a later age.
- Tax Benefits of Higher Earners: Revenue from higher tax rates on Social Security income for retirees in higher tax brackets could be used to lengthen the life of the trust fund. Currently, only up to 85% of benefits are taxable (for federal taxes), beginning at $44,000 of income for married filers.
- Modify Inflation Adjustments: Rather than raise benefits in line with the Consumer Price Index (CPI), policymakers might elect to tie future benefit increases to the "chained CPI," which assumes that individuals find less expensive alternatives in the face of rising costs. Using the "chained CPI" may make cost of living adjustments less expensive.
As we all know, there are no guarantees when it comes to the actions of politicians, and recent history with Social Security reform suggests politicians will likely kick the can down the road until the last possible moment. But with Social Security playing such a key role for so many retired Americans, it is extremely unlikely that the Social Security system would become insolvent, and incremental fixes would be implemented to ensure the long-term viability of this crucial retirement benefit.
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