Personal Finance

Social Security Is Screwed: A Lesson From the Government Shutdown

A Social Security card standing up on a tabletop, with the name and number blurred out.

After roughly five weeks, the longest federal government partial shutdown in history has ended. And with the end of this shutdown comes a sigh of relief for Social Security recipients who, nevertheless, have been receiving their retired worker, disability, or survivor benefit payouts.

Since the Social Security Administration is a federal agency, there had been concern among some beneficiaries about their payouts arriving on time. Thankfully, that's not much of an issue for Social Security recipients . That's because government shutdowns affect programs that are impacted by annual funding, whereas Social Security is funded via payroll taxes, the taxation of benefits, and the interest income collected on its nearly $2.9 trillion in asset reserves. While previous shutdowns have led to the furlough of some Social Security workers and services, this simply wasn't the case this time around.

However, it doesn't mean that there wasn't a valuable lesson to be learned for current and future retirees from this shutdown. Namely, that politicians simply can't be counted on to "fix" Social Security before 2034 rolls around.

A Social Security card standing up on a tabletop, with the name and number blurred out.

Image source: Getty Images.

Social Security is facing an imminent $13.2 trillion cash crisis

To provide some context to this point, let's take a brief look at some of the highlights from the June 2018 Social Security Board of Trustees report.

Released annually, the Trustees report examines the short-term (10-year) and long-term (75-year) outlook for America's most important social program. The newes t report forecast that the program would begin expending more money than it collects in 2018 -- however, this proved to be incorrect, with the program generating $3.2 billion in net cash surplus, per Social Security Administration data. With the exception of 2019, demographic changes, such as the ongoing retirement of boomers, growing income inequality, lower fertility rates, and increased longevity, would be expected to widen this net cash outflow with each passing year. By 2034, the almost $2.9 trillion currently in asset reserves is projected to be gone.

The good news: Social Security will continue to make payouts even if its excess cash goes bye-bye. That's because it has recurring revenue sources in the form of its payroll tax and via the taxation of benefits.

The bad news: Social Security would require an across-the-board benefit cut of up to 21% by 2034 to continue making payouts to eligible beneficiaries. That's not an optimal outlook, with more than 3 out of 5 retired workers currently leaning on Social Security to provide at least half of their income. All told, the report estimates that Social Security is facing a $13.2 trillion cash shortfall between 2034 and 2092 -- and only Congress can remedy that problem.

A stamp bearing the American flag imprinting the word, Shutdown, atop a black and white image of the Capitol building.

Image source: Getty Images.

The big lesson learned from the government shutdown

Although providing funding for a border wall and securing longevity for Social Security aren't comparable, the government shutdown did demonstrate just how wide the canyon is in ideology between the Democratic and Republican parties. Considering the relatively small amount ($5.7 billion) of money that perpetuated the shutdown, compared to a roughly $4 trillion annual budget, it's a virtual certainty that lawmakers would struggle to find a middle-ground solution to a problem that totals $13.2 trillion, and is growing by the year.

In terms of ideology, both parties have approached resolving Social Security's cash shortfall from opposite ends of the spectrum .

Democrats have long preferred increasing or eliminating the maximum taxable earnings cap tied to the 12.4% payroll tax, which in 2019 is $132,900. Each year, more than 9 out of 10 workers pay into the Social Security program on every dollar they earn, which is to say that more than 90% of all workers will have less than $132,900 in earned income this year. Meanwhile, the well-to-do have their earnings above $132,900 exempted from the 12.4% payroll tax. Since the mid-1980s, the amount o f earnings exempted from the payroll tax has grown from $300 billion to $1.2 trillion. By increasing or eliminating this cap, it would require the wealthy to pay more into the program , thereby raising additional revenue.

A mature couple examining their finances, with the husband visibly annoyed.

Image source: Getty Images.

Comparably, Republicans have proposed a gradual increase to the full retirement age, or the age at which you become eligible to receive your full payout, as determined by your birth year. Currently set to peak at age 67 for those born in 1960 or later, the GOP has called for a gradual increase to as high as age 70. This would be done to counteract the effect of longevity, which is allowing some folks to reap the rewards of a Social Security benefit for decades. By raising the full retirement age, it would require that future retirees either wait longer to receive their full benefit or accept a steeper reduction in their monthly payout if claiming early. Either way, it effectively reduces lifetime payouts from the program over the long run.

These solutions work individually, but they'd work even better if they're implemented together since they address some of the shortcomings of their opponents' plan. But that's a genuine long shot, with 60 votes needed in the Senate to make amendments to Social Security. It's been four decades since either party has had a supermajority in the Senate, making bipartisan cooperation a must for any Social Security overhaul.

To summarize, whether you're already collecting a benefit from Social Security or hope to do so in the years or decades that lie ahead, you simply can't bank on lawmakers fixing Social Security. With Congress more divided than it's been in a long time, it's a real possibility that benefit cuts, rather than a bipartisan solution, could be coming in 15 years' time.

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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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