Social Security is a critical source of income for many Americans, particularly for those in retirement. Without it, millions of individuals would face significant financial difficulties. In fact, a study by the Center on Budget and Policy Priorities highlights the importance of this program, showing that in 2022 alone, Social Security lifted approximately 22.7 million people above the federal poverty line. Of these, around 16.5 million were seniors aged 65 and older. The program has played a vital role in reducing poverty among the elderly, bringing the rate down from an estimated 38.7% to just 10.2%.
Surveys conducted by Gallup over the past two decades reflect the program’s significance for retirees, with 80% to 90% of respondents stating they rely on Social Security to cover at least some of their living expenses. Given its importance, maintaining the financial health of the program is essential for current and future retirees. However, the latest Social Security Trustees Report has indicated that the program is on shaky financial ground, and without intervention, benefit reductions may be unavoidable in the near future.
The future of Social Security
Each year, the Social Security Trustees assess the program’s financial stability, taking into consideration various factors such as economic trends and demographic changes. Since its inception in 1940, this analysis has helped ensure the program’s sustainability. However, despite a major bipartisan reform in 1983 that introduced changes like benefit taxation and an increased retirement age, the program now faces a growing shortfall. While it used to generate more revenue than it spent on benefits and administrative costs, Social Security’s reserves have been depleting in recent years. The combined reserves of the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust funds, which peaked at $2.908 trillion in 2020, have been steadily declining, with a $56.3 billion reduction in 2021, followed by further drops in 2022 and 2023.
Looking ahead, the Trustees predict a $23.2 trillion funding shortfall over the next 75 years. This shortfall doesn’t mean the program will become insolvent, but it does indicate that the current benefits schedule, including annual cost-of-living adjustments (COLAs), will be unsustainable unless changes are made. Since 1985, the Trustees have warned of this impending financial strain. However, the more immediate concern is the depletion of the OASI’s asset reserves, which could occur as early as 2033.
The OASI, which provides monthly benefits to over 51 million retirees and 5.8 million survivor beneficiaries, ended 2023 with $2.641 trillion in reserves. Even if these reserves run out, Social Security won’t go bankrupt. The 12.4% payroll tax on wages and the taxation of benefits will continue generating revenue for the program. However, maintaining the current benefit levels would require cuts of up to 21%, without further reductions, to sustain payments through 2098. Assuming an average COLA of 2.6% until 2033, a 21% reduction in benefits could mean retirees would see their annual income drop by over $6,000.
The factors contributing to Social Security’s financial challenges are largely demographic. One of the biggest drivers is the retirement of the baby boomer generation, which has significantly altered the worker-to-beneficiary ratio. While the boomers helped build the program’s reserves in past decades, their retirement has placed immense pressure on the system. Additionally, increased life expectancy has exacerbated the strain, with people living longer and receiving benefits for more years. When Social Security was introduced, life expectancy was around 63 years; now, it stands at 76.3 years as of 2021. This shift means the program must support retirees for longer periods than originally planned.
Other demographic changes, such as declining immigration and a historically low U.S. fertility rate, also play a role. Legal immigration has dropped by more than half since 1998, which means fewer workers are contributing to the payroll tax. Meanwhile, income inequality has risen, with a larger portion of earnings now exempt from the Social Security payroll tax due to the income cap. This shift has reduced the overall revenue available to the program. Additionally, the U.S. fertility rate, which reached a low of 1.62 children per woman in 2023, further strains the worker-to-beneficiary ratio.
Despite the challenges, solutions exist, though they are politically complicated. Both Democrats and Republicans have proposed reforms, but they differ in their approaches. Democrats often suggest increasing the payroll tax on higher earners, with proposals to reintroduce the tax on incomes above $400,000. This would affect a small percentage of Americans but would generate additional revenue without increasing benefits for those paying more. On the other hand, Republicans typically advocate for raising the full retirement age to reduce the program’s future costs. While this would not affect current retirees, it would lower lifetime benefits for future recipients.