A number of ongoing demographic changes such as increased longevity, the retirement of boomers, growing income inequality, declining net immigration, and lower birth rates are all taking their toll on the Social Security program. Whether in 2019 or perhaps 2020, the likelihood appears very high that Social Security’s nearly $2.9 trillion in asset reserves will shrink for the first time in close to four decades. The intermediate-cost model suggests that by 2035, a mere 15 years from now, persistent outflows will have completely the asset reserves. The question is: What happens then?
On the bright side, the answer isn’t the bankruptcy or insolvency of the Social Security program. Believe it or not, the way Social Security is currently funded ensures that the program can never go bankrupt. Social Security has three sources of funding: 1) A 12.4% payroll on earned income (ranging up to $137,700 in 2020). 2) The taxation of Social Security benefits for beneficiaries earning more than select income thresholds. 3) The interest income earned on the program’s asset reserves. (If the reserves were completely depleted, there would no longer be any interest income. For context, $83 billion was generated from interest income in 2018.)
Declining asset reserves are an indication that the existing payout schedule, including of cost-of-living adjustments, isn’t sustainable over the long run. It means that lawmakers will have to decide to either raise additional revenue to cover the forecast cash shortfall, or reduce expenditures, or enact some combination of the two. But what if lawmakers continue their stalemate and do nothing, leading to the eventual exhaustion of Social Security’s asset reserves? What then?
Unfortunately, the next step would be an across-the-board reduction in benefits for then-current and all future beneficiaries. The latest Trustees report projected that the average reduction in monthly benefits for retired workers would be 23% if the program’s asset reserves are depleted and no resolution is reached by Congress in advance of this exhaustion. That’s not good news, especially with 62% of retired workers leaning on Social Security for at least half of their income.
If there is a positive to pull out of this situation, it’s that lawmakers have always come to Social Security’s rescue with a bipartisan solution in the past. The thing is, Congress tends to wait until the last minute to actually address the problem, which should, in turn, result in working Americans paying the price in the form of higher payroll tax liability.
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