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Quantifying Social Security's Impact on Poverty


Social Security is a program that a lot of folks have probably heard about before or might be vaguely familiar with. However, there's an above-average chance that you don't fully understand just how much of a game changer it is for the more than 62 million people currently receiving a benefit check.

Social Security, while not an entitlement, is a lifesaver for those workers who've earned the prerequisite 40 lifetime work credits needed to qualify for a benefit. Though most of the beneficiaries receiving a monthly check are older Americans (age 62 and up), the Social Security program is also responsible for providing long-term disability and survivor's insurance protection for working Americans.

A partially rolled hundred-dollar bill and twenty-dollar bill blocking a Social Security card.

Image source: Getty Images.

Should an eligible beneficiary become disabled -- approximately 26% of today's 20-year-olds are expected to become disabled before reaching their full retirement age -- or unexpectedly lose their spouse to an untimely death, disability or survivor's insurance protection may be able to step in and provide income for these individuals and perhaps even their children. Yes, it's a program that first and foremost provides a financial foundation for senior citizens, but it does much more than you probably realize.

Social Security is waging war on poverty -- and winning

It's also a program that seniors have come to rely on to help make ends meet during retirement. According to the Social Security Administration, 62% of retired workers are reliant on their monthly check to account for at least half of their income. Further, 34% lean on their payout to account for virtually all of their income (90% plus).

However, a recently updated analysis from the Center on Budget Policy and Priorities (CBPP) really highlights the role that Social Security plays in building a financial foundation for its more than 62 million recipients. As updated last week, the CBPP estimates that 22.1 million people are kept out of poverty solely because Social Security provides them with a guaranteed monthly check. This includes 15.33 million elderly Americans aged 65 and up, 5.63 million adults between the ages of 18 and 64, and 1.11 million children under the age of 18.

A senior man counting a fanned pile of cash bills in his hands.

Image source: Getty Images.

Perhaps even more jaw dropping than these figures is the percentage of folks in these categories being kept out of poverty. As a whole (i.e., including all ages), Social Security reduces the poverty rate from an estimated 19.1% without to 12.3% with the program. This is most notable for elderly Americans who might not otherwise have another income source. Including Social Security, the elderly have a poverty rate of just 9.2%. If Social Security weren't there, this would jump 30 percentage points to 39.2%.

This is why the CBPP can confidently proclaim that "Social Security lifts more Americans above poverty than any other program."

Long-term issues could threaten Social Security's impact on poverty

Unfortunately, Social Security has also reached a major (and long-feared) inflection point. Beginning this year and extending for each subsequent year, the program will expend more than it collects in income. By 2034, its $2.89 trillion in asset reserves is expected to be completely depleted.

Since 1985, the Social Security Trustees' annual report has warned lawmakers that the program doesn't have sufficient income to make it the next 75 years without an across-the-board cut to benefits. Currently, the Trustees estimate that Social Security is facing a cash shortfall of $13.2 trillion between 2034 and 2092, based on the existing payout schedule. If lawmakers fail to raise additional revenue and/or cut long-term expenditures, a reduction to benefits of up to 21% may be needed to sustain payouts through 2092. If such a steep cut were to be enacted, it would almost certainly send elderly poverty rates screaming higher.

A visibly worried senior man drinking coffee while a stack of opened bills sits in front of him on a table.

Image source: Getty Images.

The problem here is twofold. First, the ongoing demographic changes that are impacting Social Security can't be stopped. Boomers will continue to leave the labor force at a quicker pace than new workers can replace them, leading to a decline in the worker-to-beneficiary ratio. Also, longevity is likely to increase over time, leading to seniors being able to receive a payout from Social Security for decades rather than years.

The other concern is that lawmakers can't agree on much of anything when it comes to Social Security. Both Republicans and Democrats have their respective solutions to resolve Social Security's long-term (75-year) cash shortfall. Since each party has one core solution that completely eliminates the cash shortfall, it leaves no incentive to work with their opposition to find a middle-ground fix. Thus, we have a multidecade stalemate on Capitol Hill with little sign of resolution.

The upshot of it is that while Social Security is successfully waging a war on poverty right now, its success may soon come to an end.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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