It’s an equally important source of income for current retirees, with Social Security Administration data showing that better than 3 in 5 seniors rely on their monthly allowance to account for at least half of their income.
In other words, it is an indispensable program that is alone responsible for keeping over 22 million people a year out of poverty.
And it is also in difficulty.
Could you survive an annual reduction of $ 5,800 in your Social Security retirement benefit?
Each year, the Social Security Administrative Council publishes a report that examines the short-term (10 years) and long-term (75 years) prospects of the program. Over the past 35 years, the Trustees’ Report has warned that long-term revenue collection will be insufficient to cover expenses. Or, in English, Social Security will not provide enough money to maintain its current level of payment. It is estimated that the program’s $ 2.9 trillion in asset reserves will be completely depleted by 2035.
The good news, if there is any to be gleaned from this forecast, is that Social Security is not at risk of going bankrupt or becoming insolvent. Two of the three sources of Social Security revenue – the 12.4% payroll tax on labor income and the taxation of benefits – are recurring, which means that as Americans continue to work , the money will still go into the program to be disbursed to eligible people. recipients.
However, once the reserves of Social Security assets are depleted, drastic cuts in benefits may be needed to maintain payments. Based on the latest report from the trustees, retired workers and survivors envision a benefit cut of up to 24% by 2035.
What would that actually look like for the typical retired worker? For context, the average retired worker was receiving around $ 1,503 per month at the start of 2020. Assuming cost-of-living adjustments averaged 2% per year through 2035, the average retired worker would earn 2%. $ 022.84 per month. If benefit cuts are enacted in 2035 to preserve long-term payments, the average retired worker would lose $ 485.48 per month of income, or $ 5,826 over the course of a year.
Here’s why social security is in big trouble
How can a program that has been paying out benefits to retirees for more than eight decades suddenly get to the point where massive benefit cuts will only be in 15 years (or less)? The answer lies in a number of demographic changes underway.
Along with the more obvious changes, such as the departure of baby boomers and increased longevity, growing income inequality is a problem to blame. The wealthy often have little or no financial constraints when it comes to paying for preventive care, medical care or prescription drugs. The same cannot be said of low-income people. This disparity allows the wealthy to live much longer and thereby collect a larger monthly check for a longer period. Over several decades, this weighed on the social security program.
Some blame can also be attributed to record birth rates. The Social Security program relies on the birth of a constant number of babies so that the worker-beneficiary ratio does not decline as future generations of workers retire. But with millennials waiting longer to get married and have children, the worker-to-beneficiary ratio could be under additional pressure.
Even immigration is a problem – but probably not the way you think it is. Social Security is based on constant levels of net legal immigration to the United States each year. Most migrants tend to be young and therefore spend decades in the labor market contributing through the payroll tax. Over the past 20 years, net legal immigration levels have halved, threatening the worker-beneficiary ratio.
And just to be clear, illegal immigration isn’t to blame, and Congress hasn’t stolen a dime from Social Security.
Hope for a solution, but don’t count on one
You are also probably wondering why the lawmakers in Washington, DC, have not addressed this mess. There is a double answer to this question.
First, it is not for lack of solutions. Democrats and Republicans have a basic solution that aims to strengthen the program. Rather, the problem is that both parties have a viable solution and therefore have no incentive to find common ground with their opposition. In other words, political pride is part of the blame.
The second problem is that all Social Security corrections have consequences. Whatever solution is chosen, certain groups of people will be worse off than before. If the rich are taxed without receiving a commensurate increase in retirement benefits, they are worse off. If the full retirement age is gradually raised, millennials and millennials will have fewer benefits for life. Because every solution results in a losing group of people, politicians are afraid to enact social security reform and lose their elected seats.
Historically, lawmakers have acted to save Social Security when it is in trouble, but they often wait until the 11th hour to do so.
We can certainly hope that Congress will come to the rescue of the social security program, as has been done in the past, but we should not rely on it. Instead, the proven method of budgeting, saving, and investing for the future is the best way to minimize our reliance on Social Security income during retirement.