Social security is without a doubt the most important social program in this country. Each year, 21.7 million Americans are lifted out of poverty solely because of their monthly social security pay, according to the Center for Budget and Policy Priorities.
It is also a program that the vast majority of Americans will to some extent lean on during retirement. The national poll Gallup found that in April 2021, 85% of non-retirees surveyed expect to rely on social security as a major or minor source of income to make ends meet in their golden years.
Still, for as successful as Social Security has been so for decades, it is not without its own set of serious financial concerns.
Social Security has not done this for four decades
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Just as investors can review a listed company’s income statement and balance sheet to gain an understanding of how much a company brings in and where those dollars go from a cost perspective, Social Security’s “balance sheet” is published annually.
Each year, the Social Security Board of Trustees publishes a lengthy report examining all facets of the program. This includes complete data on how much revenue Social Security generated from its three sources of income – the payroll tax, the taxation of benefits and interest income – and how many of those dollars were transferred to payments and administrative expenses.
Since the Social Security amendments in 1983 were passed by Congress and signed by then-President Ronald Reagan, the program has built up its liquidity reserves. This means that social security has consistently brought in more revenue each and every year than it has been paid out. Between 1982 and 2020, social security asset reserves rose from about $ 25 billion to $ 2.91 trillion.
But this trend has changed. Although the Board of Directors’ report for 2022 will not be published for at least a few more months, the Social Security Administration will update its investment portfolios on a monthly basis. The program’s asset reserves are required by law to be invested in specially issued bonds, such as U.S. government bonds. Between the end of December 2020 and the end of December 2021, the total investment held by Social Security refused with more than $ 31 billion. That’s it first cash flow for social security since 1982.
Even worse, these outflows are only meant to get worse. Based on the intermediate cost model (i.e., the projection the board believes is most likely), Social Security’s cash flow could reduce the program’s asset reserves to just $ 1.34 trillion by 2030.
Social Security has a laundry list of deficiencies
You are probably wondering how such a successful social program can be turned upside down. The answer located with a wide range of demographic shifts.
To begin with, baby boomers have been retiring from the workforce for a decade. Although their retirement from the workforce was expected, it has weighed on the relationship between workers and beneficiaries. There are simply not enough new workers entering the workforce to offset those retiring.
We also live longer, which is a bit of a double-edged sword of social security. While it’s positive to live longer because we’ll be spending more time with our family and friends, it’s a strain on a program that was not designed to pay retired workers for decades. Since 1950, the average life expectancy in the United States has increased by 11 years to 79.
As life expectancy slowly increases, birth rates in the United States increase dropped to a record low level by 2020. Although the coronavirus pandemic has undoubtedly weighed on the prospects of bringing children into the world, birth rates had fallen sharply in a decade leading up to the pandemic. Everything from waiting longer to get married and easier access to contraception to higher financial costs has pushed birth rates down.
Immigration is also a problem; but perhaps not in the sense you might think. Social Security is dependent on legal immigration into the United States to strengthen the long-term collection of payroll tax. Since most legal immigrants are young, they will spend decades in the workforce before claiming their own retirement benefit. However, legal net immigration to the United States has roughly halved over the last 25 years.
Even income inequality is one reason for the shortcomings of social security. The 12.4% payroll on earned income (wages and salaries, but not investment income) account for the bulk of the revenue collected by Social Security. However, this payroll tax has a ceiling of $ 147,000 by 2022.
For the 94% of working Americans who earn less than $ 147,000 annually, they pay into the program for every dollar they earn. Meanwhile, the remaining 6% will not owe any payroll tax over $ 147,000 in earned income. In 2016, an estimated $ 1.2 trillion in labor income taxation escaped because of this ceiling, according to the Social Security Administration. One can only imagine that this figure is even higher from 2022.
Things get worse before they get better
But the most frightening aspect of Social Security’s financial situation is that it almost certainly gets worse before it has any chance of improving.
Legislators in Congress are well aware of Social Security’s numerous shortcomings. In fact, dozens of proposals and bills have been offered on Capitol Hill over the past decade. Unfortunately, the two predominant parties in Washington are not close to an agreement on how social security can best be addressed. With each party believing they have the superior solution, neither of them has been willing to give up an inch or find common ground with their opponent.
Historically, legislators have been waiting until the 11th hour to solve problems with social security. The aforementioned amendments of 1983 were adopted with bipartisan support. However, these changes were the result of the program being less than a year after depleting its asset reserves. The board’s report for 2021 estimates social security will deplete its collective asset reserves by 2034.
Worst of all, the longer Congress waits to act, the more expensive Social Security will be to rectify. The affluent and average working American may eventually face a sharp increase in their payroll tax to correct the sinking ship of Social Security.
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