Will Social Security Be Insolvent When You Retire?

The data doesn’t lie. Whether you have already retired and are collecting a Social Security benefit, nearing retirement, or getting your feet wet in the workforce, you’re probably going to lean on Social Security income to some degree during your golden years.

In April, national pollster Gallup found that 89% of retirees rely on Social Security as a “major” or “minor” source of income. Meanwhile, 84% of surveyed nonretirees expect to lean on their Social Security income to make ends meet when they do retire.Based on these figures, it’s not far-fetched to imply that the financial well-being of seniors will depend on the health of America’s most successful social program.

There’s just one problem: Social Security isn’t all that healthy.

Image source: Getty Images.

Social Security’s asset reserves could be gone in a little over a decade

Earlier this month, the 82nd annual Social Security Board of Trustees Report was released. This 275-page report provides an in-depth, under-the-hood look at Social Security’s finances and balance sheet, and makes forecast assumptions based on a multitude of ever-changing demographic variables. In other words, it’s Social Security’s version of an annual “physical.”

Although the Board of Trustees interspersed some good news throughout the report, the main takeaway has remained the same every year since 1985: Social Security is facing a long-term (75-year) revenue shortfall.

The 2022 Trustees forecast calls for the Old-Age and Survivors Trust (OASI) — this is the Trust where retired worker and survivor benefits originate — to completely deplete its asset reserves by 2034. For some added context, the OASI had $2.75 trillion in asset reserves at the end of 2021.

If the OASI and Disability Insurance Trust (DI) were, hypothetically, combined into a single Trust, it would have until 2035 — just one extra year — before its $2.85 trillion in asset reserves, as of the end of 2021, would be gone.

There are more than a half-dozen factors that explain why $2.85 trillion in combined asset reserves from the OASI and DI could potentially be exhausted in 13 years. While you can read about these factors in greater detail, some of the more important headwinds for Social Security include historically low fertility rates, declining legal immigration into the U.S., rising income inequality, increased longevity, and boomers leaving the labor force in greater numbers.

Altogether, these challenges have future retirees wondering if Social Security will even be solvent by the time they retire.

Yearly benefits paid by Social Security have steadily climbed since its inception. US Social Security Benefits to Persons data by YCharts.

The good news: Yes, Social Security will be there for you when you retire

While the broader theme with the annual Social Security Board of Trustees Report is that the program is in trouble, the best news I can relay is that Social Security is in absolutely no danger of going bankrupt or becoming insolvent. Whether you’re already retired or 50 years away from hanging up your work coat, a retired worker benefit will await you (assuming you’ve met the requirements to receive a monthly payout).

As long as Congress doesn’t change how the program generates revenue, Social Security can exist in perpetuity. The program has three ways to generate revenue:

The 12.4% payroll tax on earned income.
The taxation of Social Security benefits.
Interest income earned on asset reserves.

Working backwards, Social Security’s “asset reserves” describe the excess cash that’s been brought in since the program’s inception. By law, this excess cash is invested in low-risk, special-issue government bonds. Last year, $70.1 billion in interest income was generated from these bonds. However, if and when the OASI and DI’s asset reserves are depleted, this source of income will go away.

The taxation of benefits was introduced in 1984. It allows up to 85% of beneficiaries’ payout to be taxed at federal income-tax rates, depending on their modified adjusted gross income. Last year, $37.6 billion was generated from taxing benefits.

However, the lion’s share of revenue for Social Security comes from the payroll tax on earned income (i.e., salary and wages, but not investment income). In 2021, $980.6 billion of the $1,088.3 billion collected by the program derived from the payroll tax. Put simply, as long as Americans keep working and paying their taxes, Social Security will always have money coming in that can be disbursed to eligible beneficiaries.

Image source: Getty Images.

The bad news: Benefit cuts and/or a loss of purchasing power likely awaits

Although America’s top social program won’t be insolvent when you retire, it doesn’t mean your eventual payout won’t come under some form of pressure.

According to the latest Social Security Board of Trustees Report, a 23% reduction to OASI payouts is forecast to become necessary by 2034 to sustain payouts over the next 75 years. If the program pulls from the DI Trust’s asset reserves, a slightly smaller reduction of 20% would become necessary for every Social Security beneficiary by 2035.

If there’s a silver lining, it’s that Congress has previously come to Social Security’s rescue with bipartisan legislation when the program was close to exhausting its asset reserves. But take note that lawmakers have a habit of waiting until the 11th hour to enact a fix.

But even if Congress were to pass sweeping legislation designed to shore up Social Security for decades to come, it still would be unlikely to reverse more than two decades of lost purchasing power.

Without digging too far into a complex problem, Social Security’s inflationary tether, which is designed to measure the inflation beneficiaries are contending with each year, is doing a poor job. The Consumer Price Index for Urban Wage Earners and Clerical Workers is geared at tracking the spending habits of urban and clerical workers. These are typically working-age Americans who spend their money quite differently from the retired workers who make up the majority of Social Security’s beneficiaries.

Since 2000, The Senior Citizens League, a nonpartisan senior advocacy group, estimates that the purchasing power of a Social Security dollar has declined by 40%. Perhaps the bigger worry is that by the time you retire, your monthly Social Security benefit is unlikely to go as far as it does today.

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