Recent headlines have spread concern that Social Security is going bankrupt. While this is a bit of an exaggeration, it is true that Social Security trust funds are projected to be exhausted by 2037. Continuing taxes would only be able to pay for around 76% of scheduled benefits. This will be an issue for Congress to address in the near future, and everyone who pays into this program or expects to benefit from it in retirement should be interested in the potential solutions. Taxpayers should strongly support any member of Congress that is willing to truthfully address the issue.
Why are the Social Security trust funds exhausted?
In 2010, the Social Security program’s cost rate started to exceed its income rate, meaning funds were beginning to be depleted. At the moment, there are around 150 million workers and their employers contributing to the Social Security program which makes payments to around 50 million families, or a 3:1 ratio. Birth rates have declined from an average of three children per woman to two children per woman, which will eventually skew this ratio. Recent cost of living adjustments – 5.9% in 2021 and 8.7% in 2022 – have made the program more expensive and accelerated the impending “bankruptcy”.
What are the consequences?
The average monthly Social Security benefit is around $1000. For three workers to provide this benefit, they each need to contribute around $300 per month. However, with a declining population, we will soon have just two workers providing this benefit, meaning they will need to either contribute $500 each per month, or, to continue paying just $300, the benefit would have to be reduced to $600 per month, a 30-40% reduction.
Without Social Security entirely, around 20 million Americans would descend into poverty. Although there aren’t figures on how many Americans would descend into poverty with a 30-40% reduction in the Social Security benefit, we do know that around half of retirees count on Social Security for half of their income. Given that continuing taxes will only pay for around 76% of scheduled benefits, it is clear that unless action is taken, many Americans stand to suffer significant financial consequences.
What are the solutions?
There are three options to fix this problem: reduce Social Security benefits by around 13%, increase Social Security tax contributions from 12.4% to 14.4%, or a combination of both. Taking these actions will fund payments for around 75 years (which really is not much when we’re talking about retirement).
It is likely not an option to supplement the Social Security trust funds with General Funds; this would likely be deemed unconstitutional. The Social Security program is something you pay into and then your benefit is reflective of your contributions rather than your need. Funding Social Security payments through the General Fund means potentially giving money to individuals who don’t need it, and General Funds ought to be spent with more caution. However, Social Security is considered welfare, and welfare is determined by Congress rather than by individual states.
What is public opinion?
A 2019 survey indicated that 32% of Americans supported increasing funding (or in other words, taxes) to make up a Social Security shortfall. 21% supported a combination of reducing benefits and raising taxes, and 18% supported simply cutting benefits. It is worth noting that a 2021 survey indicated that nearly half of Millennials said they believed they wouldn’t ever receive any Social Security benefits.
It is also worth noting that public opinion isn’t necessarily good policy. Consequently, as time quickly passes with a deeply divided House and Senate and public opinion does not wake up to the impending crisis, taxpayers’ only hope will rest with members of Congress that are brave enough to loudly sound this alarm. They will need to survive the onslaught of vitriol that will be aimed at them by entrenched special interests and will also face cheap shots from those that want to defeat them in reelection campaigns. With more than 70% of federal spending now being eaten up by these “mandatory spending” items, our nation’s fiscal health depends on it.