Social Security Solvency by the Numbers
By Mike Rahn, CISP
There is a classic model used to describe the financial support that Americans rely on for their retirement security. It is the three-legged stool. The legs of this stool have traditionally been these: formal retirement savings in IRAs and employer-sponsored retirement plans; personal savings and investments; and Social Security.
The stability and reliability of this stool has always varied from person to person, depending on income, saving opportunities—or lack thereof—offered by an employer, investing savvy, and willingness to save and put off immediate rewards in exchange for future security.
One leg of the retirement security stool that has always seemed solid has been Social Security. Until recently, that is. Today we often see headlines warning of Social Security’s impending insolvency, the depletion of the Social Security trust fund, and the prediction that this retirement safety net may not be there to protect our children and grandchildren.
As is often the case, the truth lies somewhere this side of doomsday predictions. At the same time, there is real risk that the level of benefits enjoyed by today’s Social Security beneficiaries may not be sustainable for tomorrow’s retirees. The Congressional Research Service (CRS), which provides statistical information and research to inform federal lawmakers, recently updated a previous report that it published on the solvency of the Social Security system. This data provides food for thought and takes the discussion out of the realm of speculation and hearsay.
Funding Problem
At the core of the Social Security funding problem is the dramatic change in the ratio of workers contributing to the trust fund through payroll withholding, compared to the number of beneficiaries who are receiving a check each month. Social Security has always been a program in which current workers’ payroll withholding provides the funding for those who are already retired.
In 1950, there were 16.5 workers for every retiree receiving benefits. In 2018, that ratio had fallen to 2.8, and now in 2020, is about 2.75, and is expected to fall to 2.3 in 2035. There simply are not enough workers compared to Social Security beneficiaries to sustain benefits at the level that current formulas provide. More Americans are living longer and continuing to receive benefits, while a declining birth rate has resulted in a smaller workforce.
Some noteworthy findings in the 2020 CRS update include the following.
In 2019 the Social Security trust fund had reserves of $2.9 trillion (held in U.S. Treasury securities) available for future program spending.
In 2019, the program had total income of $1,062 billion (92.4% from dedicated payroll tax revenues), and total expenditures of $1,059 billion (98.9% for benefit payments).
There are an estimated 178 million covered workers and approximately 64.5 million Social Security beneficiaries in 2020 (the above-described 2.75-to-1 ratio).
With 92.4% of funding coming from payroll withholding, when employment suffers—as in the post-2008 recession and current COVID pandemic—funding is affected.
Under current benefit formulas and with existing asset reserves, the Social Security trust fund is expected to be able to pay full promised benefits until 2035.
After 2035, program revenues—under current rules—are projected to cover about 79% of promised benefits, and incrementally drop to 73% by 2094.
There is no statutory authority for the Social Security Administration to borrow federal general funds, yet there is a legal obligation to provide benefits to those eligible under the Social Security Act.
Some Possible Solutions
It is a mistaken belief that the Social Security trust fund will be “broke” and be unable to pay benefits beginning in 2035, as some have warned. Benefits would have to be reduced, as noted above, but would continue to be paid at the stated rates through 2094. Possible courses of action to avoid or minimize reducing benefits are noted below.
Increase the amount of worker earnings subject to the payroll tax; this would affect the estimated 6% of covered workers who have earnings above the current taxable wage base ($137,700 in 2020).
Increase the payroll tax rate; this would affect all covered workers.
Raise the Social Security full retirement—and full benefit—age.
Modify the benefit formula (reduce the percent of earnings received as a benefit).
Slow the annual cost-of-living adjustment increases.
Social Security Board of Trustees Hypothetical Solutions
Two solutions have been hypothesized that could maintain Social Security benefit stability. Neither would likely be popular, as the first would reduce workers’ take-home pay, and the second would reduce Social Security benefits.
Immediate 3.14 increase in payroll tax rate (from 12.4 to 15.54)
Immediate across-the-board benefit reduction of 19% for all, or 23% reduction for newly-eligible
Something Must Be Done
Social Security benefits have been described as “the third rail of American politics,” alluding to electrified railroads and almost certain electrocution for those foolish enough to touch the third rail that powers them. Social Security is an issue so sensitive that any member of Congress who dares meddle could suffer politically. Yet it is undeniable that something has to be done to align expected future revenue with promised benefits.
