Social Security hasn’t done this since 1981. Should I be concerned about my beneficiaries?

No program is more important to the financial well-being of Americans than Social Security. Each year, America’s leading retirement programs are responsible for lifting 21.7 million people out of poverty, including approximately 15.4 million adults age 65 and older. According to estimates by the Center on Budget and Policy Priorities, if Social Security did not exist, the poverty rate among seniors in the United States would be nearly four times higher (10 percent with it versus 38 percent without it).

Because most current and future retirees are or will continue to rely on Social Security income to cover living expenses, it is essential to keep the program’s foundation strong. Unfortunately, cracks are starting to appear in the proverbial thread.

In particular, the Social Security Administration is scheduled to do something in 2023 that hasn’t been seen since 1981, which is certainly concerning for current and future beneficiaries.

Image source: Getty Images.

Social Security hasn’t done this in 40 years.

In 1983, a bipartisan Congress passed and then-President Ronald Reagan signed the Social Security Amendments of 1983 into law. This marks the last major overhaul of the Social Security program, which was necessitated by the trust fund’s asset reserves, which operate literally on deferrals.

The program’s “asset reserves” represent excess cash accumulated from the beginning. This cash must, by law, be invested in special interest-bearing government bonds. The interest you earn on these bonds is one of Social Security’s three sources of income. The 12.4% payroll tax on earned income and taxation on benefits are the other two.

The 1983 amendments not only introduced taxation of benefits for high-income beneficiaries, but also gradually raised payroll taxes and retirement ages over time. Some of these measures helped raise additional revenue for Social Security and continued to expand the program’s total asset reserves for decades. Between 1983 and 2020, the year-end asset reserves of the Old Age and Survivors and Insurance Trust Fund (OASI) and the Disability Insurance Trust Fund (DI) increased from a total of $24.9 billion to $2.908 trillion.

Then things changed, but not for the better.

Total asset reserves in the Social Security Trust Fund decreased by $56.3 billion in 2021. This is the first decline in asset holdings in 40 years. In 2022, combined OASI and DI asset holdings fell by an additional $22.1 billion. As of the end of October 2023, the Social Security Administration’s portfolio of public bonds and debt certificates showed the program’s total asset reserves had decreased by $33.2 billion to $2.797 trillion. This is the first three-year decline in Social Security asset holdings since 1981.

U.S. Old Age, Survivors, and Disability Insurance Trust Fund assets according to year-end data from YCharts.

Why are Social Security’s asset reserves suddenly decreasing?

Before we go any further, let’s create it first. richly clear The best retirement program in America is that there is no risk of going bankrupt or becoming insolvent. Social Security gets about 90% of its revenue from payroll taxes on benefits. If Americans continue to work and pay taxes, there will always be tax revenue to pay out eligible beneficiaries.

The problem with Social Security is how much benefits current and future beneficiaries will receive on a monthly basis 10 years from now. The 2023 Social Security Committee report estimates that OASI will exhaust its asset reserves by 2033. If this happens, across-the-board benefit cuts of up to 23% for retired workers and survivors could be necessary to maintain payments through 2097 at no additional cost. wound.

How did the Social Security situation get so bad? Much of the blame lies with various demographic changes.

For example, legal immigration to the United States has fallen by more than half since 1998. Most legal immigrants tend to be young. This means they will remain in the workforce and contribute through payroll taxes for decades. Put another way, Social Security’s livelihood depends on legal immigrants coming to the United States every year.

Another problem for Social Security is the historic decline in the U.S. birth rate. The program’s worker-to-beneficiary ratio has been under pressure for a decade as boomers have left the workforce in greater numbers. The continued decline in birth rates will further depress this rate in the coming decades.

Rising income inequality is another problem for Social Security. In 2024, all earned income between $0.01 and $168,600 will be subject to payroll tax, while wages and salaries exceeding $168,600 will be exempt. The amount of earned income exempt from payroll taxes has been increasing over the past 40 years, potentially “cheating” Social Security out of collectible revenue.

With no end in sight to this demographic shift, Social Security’s asset reserves will continue to decline.

Image source: Getty Images.

There is gridlock on Capitol Hill over how best to improve Social Security.

What’s interesting is that lawmakers are recognizing the shortcomings of Social Security and that reforms are needed to strengthen the program. There was certainly no shortage of proposals to improve the financial well-being of Social Security.

The challenge in Washington, D.C., is that America’s two major political parties are approaching problem solving from opposite ends of the spectrum. Because their respective plans work to strengthen Social Security, neither side believes they should give an inch to opposing views or find common ground.

Democratic lawmakers, including President Joe Biden, have proposed raising payroll taxes on high-income workers and changing the program’s measure of inflation from the Consumer Price Index for Urban Wage and White Collar Workers (CPI-W) to the Consumer Price Index. For older adults (CPI-E). The bottom line is that Democrats in Congress are approaching solving the problem by raising additional revenue and potentially increasing benefits in the process.

Meanwhile, Republicans favor the idea of ​​gradually raising full retirement age to reduce lifetime benefits and lower spending. Republicans on Capitol Hill also believe chained CPI would be a better alternative than CPI-W for measuring inflation and determining annual cost-of-living adjustments.

Both plans can achieve their goals, but they also have very obvious flaws. The Republican plan would take decades to reduce benefit spending, but it would do nothing to prevent OASI’s projected depletion of its asset reserves by 2033. Meanwhile, taxing the rich alone will not offset Social Security’s estimated $22.4 trillion unfunded debt shortfall by 2097. .

If there’s a silver lining here, it’s that Congress always steps up at the 11th hour to support and reform Social Security. But because lawmakers from both parties are so far apart ideologically, Social Security’s financial health is likely to deteriorate significantly before reform can hope to improve it.