Social Security is an important source of income for many Americans, especially those in retirement. Without it, millions of people would face serious financial difficulties. In fact, a study by the Center on Budget and Policy Priorities emphasizes the importance of this program, estimating that in 2022 alone, Social Security will lift approximately 22.7 million people above the federal poverty line.
Of these, approximately 16.5 million were seniors aged 65 and up. The program has played an important role in reducing poverty among the elderly, lowering the rate from an estimated 38.7% to only 10.2%.
Gallup polls conducted over the last two decades reflect the program’s importance for retirees, with 80% to 90% of respondents claiming to rely on Social Security to cover at least some of their living expenses. Given its importance, the program’s financial health is critical for both current and future retirees.
However, the most recent Social Security Trustees Report indicates that the program is on shaky financial ground, and that without intervention, benefit cuts may be unavoidable in the near future.
The future of Social Security
Every year, the Social Security Trustees evaluate the program’s financial viability, taking into account a variety of factors such as economic trends and demographic shift. Since its inception in 1940, this analysis has helped to ensure the program’s viability.
However, despite a major bipartisan reform in 1983 that included changes such as benefit taxation and a higher retirement age, the program is now facing a growing deficit. While Social Security used to generate more revenue than it spent on benefits and administrative costs, its reserves have dwindled in recent years.
The combined reserves of the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust funds peaked at $2.908 trillion in 2020, but have steadily declined, with a $56.3 billion reduction in 2021, followed by further drops in 2022 and 2023.
Looking ahead, the Trustees anticipate a $23.2 trillion funding shortfall over the next 75 years. This shortfall does not imply that the program will become insolvent, but it does indicate that the current benefits schedule, including annual cost-of-living adjustments (COLAs), will be unsustainable unless changes are implemented.
Since 1985, the Trustees have warned of the impending financial strain. However, the more pressing issue is the depletion of the OASI’s asset reserves, which could occur as early as 2033.
The OASI, which pays monthly benefits to over 51 million retirees and 5.8 million survivor beneficiaries, ended 2023 with $2.641 trillion in reserves. Even if these reserves run out, Social Security will not declare bankruptcy. The 12.4% payroll tax on wages and the taxation of benefits will continue to generate revenue for the program.
To maintain current benefit levels, however, cuts of up to 21% would be required, with no further reductions, to sustain payments through 2098. Assuming an average COLA of 2.6% until 2033, a 21% reduction in benefits could result in an annual income drop of more than $6,000.
Demographic factors are primarily to blame for Social Security’s financial difficulties. One of the most important drivers is the retirement of the baby boomer generation, which has significantly altered the worker-to-beneficiary ratio.
While the boomers contributed to the program’s reserves in previous decades, their retirement has put significant strain on the system. Furthermore, as people live longer and receive benefits for longer periods of time, the strain on the system has increased.
When Social Security was first introduced, life expectancy was around 63 years; as of 2021, it is 76.3 years. As a result of this shift, the program will have to support retirees for longer periods of time than planned.
Other demographic changes, such as declining immigration and a historically low U.S. fertility rate, also contribute. Since 1998, legal immigration has decreased by more than half, resulting in fewer workers contributing to the payroll tax.
Meanwhile, income inequality has increased, with a greater portion of earnings now exempt from the Social Security payroll tax due to the income limit.
This shift has reduced the program’s overall revenue potential. Furthermore, the United States’ fertility rate, which fell to 1.62 children per woman in 2023, puts additional strain on the worker-to-beneficiary ratio.
Despite the challenges, solutions exist, albeit politically complicated. Both Democrats and Republicans have proposed reforms, but their approaches vary. Democrats frequently propose raising the payroll tax on higher earners, with plans to reintroduce the tax on incomes exceeding $400,000.
This would affect a small number of Americans while generating additional revenue without increasing benefits for those who pay more. Republicans, on the other hand, typically advocate raising the full retirement age in order to reduce future program costs. While current retirees would be unaffected, future recipients’ lifetime benefits would be reduced.
