Happy 84th Birthday, Social Security
Regardless of whether Siri or Alexa added it to your calendar, today, Aug. 14, marks the 84th "birthday" of the most storied social program in our nation's history: Social Security.
When the Social Security Act was signed into law on Aug. 14, 1935, by President Franklin D. Roosevelt, it was unclear just how important this program would become. Today, it's responsible for issuing more than 63 million benefit checks each month, 70% of which go to retired workers, and according to an analysis from the Center on Budget and Policy Priorities, it keeps more than 22 million people out of poverty, including over 15 million retired workers.
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When crafted in the mid-1930s and signed into law, Social Security was initially designed to provide a financial foundation for older workers who could no longer provide for themselves. But the program has evolved substantially since then, and now provides for more than just elderly workers.
In addition to covering retired workers, the spouses of retired workers and their young children may also be eligible for benefits. The program also provides survivor's insurance in the event of the untimely passing of a household's economic breadwinner. Today, more than 5.9 million people receive a monthly survivor benefit that averages about $1,196.
Furthermore, the Amendments of 1956, signed into law by President Dwight Eisenhower, assured that certain Americans with long-term disabilities would have some form of financial protections. It's been estimated by the Social Security Administration that 90% of today's working Americans between the ages of 21 and 64 have disability insurance protection from Social Security, with 96% of those aged 20 to 49 covered by survivor's insurance protection.
In other words, it's a near-certainty that elderly, disability, and widowed poverty rates would be considerably higher if Social Security did not exist.
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The best gift Social Security can provide
Even though it's Social Security's birthday, and birthdays are usually a time reserved for receiving gifts, it's Social Security that continues to do the giving.
Despite facing a number of well-known problems outlined in the latest annual report from the Social Security Board of Trustees, the greatest gift that Social Security can provide to workers who'll qualify for a retirement benefit is the certainty of receiving said benefit.
While it's true that the Board of Trustees expects Social Security to expend more than it collects in revenue in 2020 -- and it remains very likely that the program's net-cash outflow will expand with each passing year -- the great news I can pass along is that Social Security has virtually no chance of going bankrupt, short of Congress completely changing how the program is funded.
Even in a worst-case scenario, such as the complete depletion of Social Security's nearly $2.9 trillion in asset reserves by 2035, Social Security would be able to survive with ease thanks to its two recurring sources of revenue: the 12.4% payroll tax on earned income and the taxation of Social Security benefits. As long as the American public continues to work and earn money, the payroll tax and the taxation of benefits, which provided $920 billion out of the $1 trillion collected in 2018, ensures that there will always be money to disburse to eligible beneficiaries. Regardless of whether you retire in five years or 50 years, Social Security will be there for you.
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One Social Security issue that can't be overlooked
Where Social Security could falter, though, is in the sustainability of the current payout schedule.
Yes, you will receive a retired worker benefit if you earn the requisite number of lifetime work credits (40). However, there's no guarantee that what the program estimates you'll receive each month at full retirement age, or what you're currently receiving as a retired beneficiary (inclusive of cost-of-living adjustments), will stay the same after 2035. That's because Social Security is facing a $13.9 trillion cash shortfall between 2035 and 2093. Without any congressional action to address this shortfall, such as amending the program to bring in additional revenue, benefit cuts of up to 23% could be passed along to retired workers in order to sustain payouts through 2093.
No one wants to see their Social Security benefits cut, but it's particularly worrisome given that more than 3 out of 5 of today's retired workers lean on their payout to provide at least half of their monthly income, with 34% reliant on Social Security for essentially all of their income. These folks would be particularly exposed to a 23% haircut to their payout.
Now, there is hope that lawmakers come to the rescue and provide a bipartisan fix for Social Security, much in the way they did in 1983 during Ronald Reagan's administration. But considering how politically divided Washington is right now, a workable solution is far from guaranteed.
Thus, while Social Security will be here for a long time to come, you should be focused on reducing your reliance on this storied program.
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