The Social Security Act was enacted in 1935 as a means to provide a safety net for elderly, unemployed, and disadvantaged Americans. The Act was also to pay financial benefits to retirees over the age of 65, and the payout to be based on the amount contributed via payroll tax contributions. Since its inception, Social Security has been plagued by issues and political turmoil which still continue to this day. A looming question for many people in their 30’s or 40’s is whether Social Security will be around when they retire.
Many have misconstrued this to mean the program will no longer be able to support providing benefits, which is untrue. What it does mean is that those expecting to receive benefits beginning in 2035 or later should expect a reduction in benefits of about 20-25%, which is certainly not great news, but may come as a slight reprieve to those who anticipated receiving no benefits at all.
Why has Social Security become insolvent?
There are many reasons Social Security is where it currently stands. Political differences and gridlock have prevented any reasonable fixes to the program, and the longer it takes to make any adjustments the more precarious the situation becomes.
There has also been a dramatic demographic shift within the U.S. which has led to an increase in the costs of Social Security and a decrease in funding. Life expectancies have increased since the inception of the program, thus benefits are being paid over a greater number of years. Over 10,000 baby boomers are retiring every day and beginning to collect benefits. As referenced by the chart below , the ratio of covered workers per retiree has been steadily declining as well, which results in a higher percentage of benefits being paid out than funding received.
What can be done to improve Social Security moving forward?
With all the negatives surrounding the program there are improvements which can be made, but would require politicians to work together to formalize a plan. A few of the most talked about adjustments include raising the Payroll Tax Cap (currently at $137,700 for 2020), raising the Payroll Tax Rate (currently at 12.4% combined for employee & employer) and raising the Full Retirement Age (currently around age 67 years depending on date of birth). Each of these ‘fixes’ comes with their own set of political differences, which results in gridlock as evidenced by the current state of the program.
While Social Security is facing a large and growing shortfall, the fact that the program is projected to become insolvent does not mean the elimination of benefits, however it is reasonable to plan for a reduction in benefits. There is still some time for changes to be made to improve the long-term sustainability of the program, but only time will tell whether politicians can devise such a solution.