Is Social Security in Jeopardy?
/By Shelley Murasko
Social Security has long been a cornerstone of American retirement security, providing financial assistance to retirees and the disabled. However, concerns about the long-term viability of the Social Security system have been growing over recent decades. With shifting demographics, political debates, and evolving economic landscapes, understanding the future of Social Security requires a look at its current challenges, potential changes, and the broader implications for future generations.
A Brief Overview of Social Security
The Social Security Program was established in 1935 under President Franklin D. Roosevelt as part of the New Deal, a series of programs created to restore economic prosperity and lift the country out of the Great Depression. It was designed to provide economic security to Americans, particularly older individuals and the disabled. At that time, the average life expectancy was age 631, and Social Security didn’t commence until age 65.
The current system primarily operates on a pay-as-you-go basis, meaning that today's workers fund the benefits of current retirees through payroll taxes. These taxes, which equate to 12.4% of every paycheck, are collected through the Federal Insurance Contributions Act (FICA). In return, workers earn credits toward their future Social Security benefits.
Whenever there is a shortfall between FICA taxes collected and Social Security Benefits paid, the Social Security “trust fund” covers the deficit.
Current Challenges Facing Social Security
While Social Security has proven to be a reliable safety net for millions of Americans, questions about its long-term sustainability have surfaced due to several factors. Key issues include:
Demographic Shifts: The aging population is perhaps the most significant challenge to Social Security’s future. The baby boomers (those born between 1946 and 1964) are rapidly entering retirement. With people living longer, the ratio of workers to retirees is shrinking. In 1960, there were about 5.1 workers for every Social Security beneficiary. Today that ratio has dropped to around 2.8 workers per beneficiary2. As more people retire and fewer young workers enter the workforce, this ratio is projected to decrease even further.
Longer Life Expectancy: Advances in healthcare and technology have increased life expectancy to age 79 in 20243, which means retirees are collecting Social Security benefits for a longer period. This, combined with the sheer number of people retiring, places additional strain on the system.
Funding Shortfalls: The Social Security Trust Fund has helped support the program during periods of deficit. According to the 2024 Social Security Trustees report, it’s expected to be depleted by 2035. After that, payroll taxes would cover about 83% of scheduled benefits unless changes are made to address the shortfall, and they would further decline to 73% of scheduled benefits by 2098. This might come as a surprise to those who assume that the exhaustion of trust fund reserves would mean that no (or very little) benefits would be paid.4
Economic and Workforce Changes: The structure of the U.S. labor market is evolving. A rise in gig work and freelance positions have led to shifts in how and when people work. This has affected the traditional model of payroll contributions. Furthermore, economic downturns like the 2008 financial crisis and the COVID-19 pandemic can reduce payroll tax revenues due to widespread job losses and wage stagnation.
Potential Solutions
To ensure the long-term viability of Social Security, economists, policymakers, and advocacy groups have proposed several solutions. Some of the most popular reforms include:
Raising the Retirement Age: One potential solution is to gradually increase the full retirement age (FRA) since people are living longer. Currently, the FRA is 67 for those born after 1960. Raising the age to 68 or 70 could help reduce the strain on the system.
Increasing Payroll Taxes: Another solution is to raise the payroll tax rate. Currently, workers and employers each contribute 6.2% of wages, up to an annual limit of $168,600 in 2024. Increasing this rate by even a small percentage could help shore up the system's finances. In fact, a total 3.3% increase would shore up the shortfall entirely.5 Alternatively, lifting the payroll tax cap, so that higher earners pay taxes on all their income (not just up to the current limit), could significantly increase revenues.
Changing the Benefit Formula: Reforming the way Social Security benefits are calculated could also extend the program's life. For instance, the government could reduce benefits for higher earners while preserving or increasing benefits for low- and middle-income retirees. This approach would make the system more progressive while addressing funding gaps.
Privatization or Personal Accounts: Some proponents advocate for partially privatizing Social Security by allowing individuals to invest a portion of their payroll taxes in personal retirement accounts. This approach is highly controversial as it introduces market risk and could exacerbate inequality, but supporters argue that it could offer higher returns than the current system since currently the Social Security trust fund is largely invested in Treasury bonds.
Reducing Benefits: A more drastic option would be to cut Social Security benefits outright. This could involve means-testing, where only those below a certain income threshold would receive full benefits or an across-the-board reduction. Such proposals are politically unpopular and could leave many retirees, particularly those without other sources of income, in financial distress.
The Role of Politics
The future of Social Security is deeply tied to political decisions. The program remains a contentious issue in Congress with Democrats and Republicans proposing different paths forward. Democrats typically favor measures that preserve benefits while increasing the payroll contribution percentage or lifting the payroll tax cap. Republicans, on the other hand, often advocate for reforms aimed at reducing long-term costs, such as raising the retirement age or slowing benefit growth for wealthier Americans.
The political gridlock on this issue means that any significant reform may be delayed until the funding crisis becomes more urgent. This could lead to the implementation of more drastic and less popular measures at the last minute.
Implications for Future Generations
Younger generations, including Millennials and Gen Z, are particularly concerned about the future of Social Security. Many express skepticism about whether the program will exist when they retire. However, despite the challenges, it’s unlikely that Social Security will disappear entirely. It remains an essential part of the U.S. social safety net, and political leaders understand that failure to act would have severe consequences for millions of Americans.
However, the program as it exists today may not provide the same level of benefits for future retirees unless reforms are enacted. Younger workers may need to save more for retirement through private means, such as 401(k) plans or IRAs, and they may have to work longer before claiming benefits.
Conclusion
The viability of Social Security in the coming decades is a pressing issue that requires careful attention and timely action. While the program faces significant financial challenges, there are a range of solutions available that can help ensure its long-term survival. The choices made by policymakers today will determine whether Social Security remains a stable and reliable source of support for future generations of retirees. Despite the uncertainty, one thing is clear: the stakes are high, and the future of millions of Americans depends on finding a path forward.
Sources:
1. University of California Berkeley. (2024). Life expectancy in the USA, 1900-98. Retrieved October 9, 2024.
2. Why Is Social Security Running Out of Money? (2023, November 3). Free the Facts. Retrieved October 9, 2024.
3. Macrotrends. (2024). U.S. Life Expectancy 1950-2024. Retrieved October 9, 2024.
4. Social Security Administration. (2024). The 2024 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Retrieved October 9, 2024.
5. Van Deusen, Adam. (2024, October 2). Helping Nervous Clients Understand the (True) State of the Social Security System and What It Means for Their Retirement. Kitces Blog. Retrieved October 9, 2024.
