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Social Security Is About to Do Something That Nearly Half of All Americans Have Never Seen Before

There's little denying how important Social Security is for our nation's retired workforce. This is a program that's currently helping to keep more than 15 million retired workers above the federal poverty line each month, and is responsible for at least half of the monthly income for 62% of retired beneficiaries.

Yet, it's also a program facing a laundry list of challenges, many of which could lead to the depletion of Social Security's asset reserves by 2035. That's according to the latest annual report from the Social Security Board of Trustees.

Two Social Security cards lying atop and partially covering a hundred-dollar bill.

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Almost half the country has never seen this happen before

Next year could be an especially pivotal year for the Social Security program. You see, the Trustees have projected a $4.3 billion net cash outflow from the program in 2020, with $1.109 trillion being collected, and $1.113 trillion being expended via benefit outlays, administrative costs, and transfers to the Railroad Retirement Board. This would mark Social Security's first annual net cash outflow in quite some time.

How long, you ask? We'd have to go all the way back to 1982, the year prior to the Reagan administration passing the last major overhaul of Social Security, to find when net cash outflows were a regular thing for the Social Security program. This means there are 162 million Americans alive today, according to estimated population figures from the U.S. Census, as of November 2019, that weren't alive the last time Social Security spent more than it generated in revenue in a given year. That's nearly half of the United States' population of 329.9 million people.

On one hand, a $4.3 billion net cash outflow isn't exactly going to ruffle a lot of feathers when there's $2.9 trillion in asset reserves. On the other hand, this outflow isn't a one-time event. With each passing year, this net cash outflow is expected to grow significantly, with the Trustees forecasting a $182.5 billion outflow by 2028. By the time 2035 rolls around, this $2.9 trillion in asset reserves is projected to be completely gone.

Two Social Security cards lying on top of a W2 tax form, highlighting payroll taxes paid.

Image source: Getty Images.

Here's why Social Security is struggling

You might be wondering how, exactly, a program that's been paying benefits without interruption for nearly 80 years is suddenly faced with a rapidly deteriorating financial outlook? That answer boils down to a host of ongoing demographic changes.

For one, Americans are living considerably longer now than they were when Social Security was signed into law in 1935. Over the past 84 years, the average life expectancy at birth has risen by more than 16 years, with the typical 65-year-old living an average of 20 more years. By comparison, the full retirement age, which is the age at which a worker becomes eligible for 100% of their monthly payout, will rise for just the 10th time in 85 years in 2020. It won't even have increased two full years (from age 65 to 67) until 2022. This disparity has placed a lot of strain on Social Security.

Another concern is growing income inequality. Aside from the fact that a larger percentage of earned income is escaping the 12.4% payroll tax that's the primary funding mechanism of Social Security, the well-to-do tend to live considerably longer than lower-income folks who the program was designed to protect. You see, the wealthy have few financial constraints when it comes to receiving preventative care, medical care, or prescription drugs, which isn't necessarily true for low-income workers. This allows the well-to-do to not only live longer, but also collect a bigger payout from Social Security in the process.

Persistently low birth rates might prove to be another problem for Social Security. The steady retirement of baby boomers is already weighing down the worker-to-beneficiary ratio, and a future decline in this ratio might be in the cards in birth rates don't pick up relatively soon.

The point is that there are a number of reasons Social Security is struggling, and these catalysts aren't going to ebb anytime soon.

A blue Democrat donkey and red Republican elephant butting heads.

Image source: Getty Images.

We're nowhere near a fix at the moment

Maybe the scariest aspect of this imminent net cash outflow is that Congress hasn't done a thing to stop it.

As noted, the Board of Trustees releases its short- and long-term outlook for Social Security on an annual basis. The Trustees have been cautioning Congress since 1985 that there was insufficient revenue to cover expenditures over the long term, which is defined as the 75 years following a report's release. Suffice it to say, it's not like lawmakers haven't had adequate warning.

But the problem with Capitol Hill has little to do with thinking up answers and everything to do with playing nicely with others. That's because, despite each having core solutions that would make Social Security a stronger program, neither Democrats nor Republicans are willing to work with their opposition to find a middle-ground solution.

For their part, Democrats have approached fixing Social Security by raising additional revenue. This would be done by raising or eliminating the payroll tax earnings cap, which is set at $132,900 in 2019. In layman's terms, this would require higher-income workers to pay more into the program each year. However, Republicans oppose any tax hikes that specifically target these well-to-do workers.

Meanwhile, Republicans would prefer to gradually raise the full retirement age from 67 to as high as age 70. In doing so, it would require future generations of workers to either wait longer to collect their full monthly payout or accept a steeper reduction to their payout by claiming early. No matter their choice, the lifetime payouts to future generations would decline, thereby reducing program outlays. Democrats, though, oppose any cuts to Social Security benefits.

So, this is where we are: Big changes are coming, but Capitol Hill is too paralyzed by partisanship to do anything about it.

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