On November 4, 2019, the Social Security Administration issued a report addressing the funded status of the Social Security retirement program. “Social Security: Demographic Trends and the Funding Shortfall” (Report). The Report’s findings and conclusions should be of great concern to anyone who is, or may be, dependent on Social Security benefits for a comfortable retirement.
The Social Security program pays benefits to retired or disabled workers and their families and to family members of deceased workers. It was set up as a pay-as-you-go system where revenues would cover costs. However, the U.S. population has been growing older, due primarily to decreasing fertility and increasing longevity. As a result, retirees are being replaced in the workforce by a smaller number of workers who pay into the Social Security system. At the same time, program costs are increasing as larger numbers of retirees are collecting benefits for a longer period of time. This situation is unsustainable if one expects Social Security to pay 100% of scheduled benefits.
Although the Social Security trust fund currently has a reserve or $2.89 trillion, these assets are expected to be depleted by 2035, after which Social Security will only be able to pay 80% of scheduled benefits UNLESS revenues are increased, benefits reduced, or both. The primary method discussed to improve revenues is to increase the Social Security payroll tax, which is currently at 12.40%. But, of course, no politician wants to be identified as voting for a tax increase. A more politically feasible way of balancing costs and revenues would be to reduce benefits in a way that does not seem like a benefit cut. For example, as has been done in the past, the age at which a person could collect Social Security benefits could be increased. Persons impacted by such a change would therefore collect benefits for a shorter period of time. They have, in effect, experienced a benefit reduction.
But, adjusting the age at which benefits could be claimed would not be sufficient to offset the program’s long-range funding shortfall. So another idea for improving the program’s funding is to incentivize workers to delay the start of their Social Security benefits. To some extent, this incentive already exists, as for each year a worker delays commencement of benefits after full retirement age, up until age 70, the worker’s benefit increases by 8%. However, delaying the commencement of benefits alone is insufficient to balance costs with revenues.
Another option suggested for avoiding a funding shortfall is to calculate workers’ Social Security benefits based on their highest 40 years of earnings, rather than their highest 35 years of earnings (the present computation period). Under this scheme, a worker could choose to work more years to replace years of lower earnings with years of higher earnings. But, as the Report points out, increasing the number of computation years could have a negative impact on workers with physically demanding jobs, as many would be unable to work the extra years. They would simply experience a benefit cut. While that would reduce costs to the program, it would do so by favoring workers with less arduous jobs over those whose work is more labor intensive.
As you can see, there are no easy or palatable options for reforming our nation’s Social Security retirement program such that it will be able to pay 100% of scheduled benefits after 2035. However, the Report suggests that any reforms must include both revenue-increasing and benefit-reducing measures if we are to meet the 100% goal and ensure the long-term solvency of the program.
[To read more of my posts about pension and retirement issues, please go to my Facebook Page “Pension Justice 4 You” and if you like it, click the Like and Follow buttons and share the Page (or any Posts on it) with your Friends. If you are in need of pension assistance, please call me or email me, Eva Cantarella, at 248-335-5000 or [email protected]]