Fear of the unknown is nothing new. For countless generations, people have stockpiled resources in order to mitigate the potential of scarcity in the future. However, when the future is unstable, how do you prepare for the unknown? For many middle-aged and young adults, a future without Social Security seems to lurk on the horizon. As confidence in this long-standing institution begins to crumble, where should we turn for answers?
Addressing Public Perception
For millennials and middle-aged Americans in particular, faith in the program has begun to decline. According to a recent study by Bankrate, approximately three out of ten people under 50 believe that Social Security will run out by the time they are ready to apply for benefits. The younger they are, the higher the likelihood that they will hold these beliefs. While this lack of hope is concerning, is it truly indicative of actual problems?
In a 2014 report, the trustees of the Social Security program projected that trust fund reserves would expire in 2034. In other words, Social Security wouldn’t be able to pay full retirement benefits beginning in 2033. You might be wondering: how did this happen in the first place? Basically, the shortfall exists because of three major factors that have culminated in an imbalanced budget for the program. Costs are rising faster than the tax base is able to sustain. Consider the following explanations courtesy of public trustee for Social Security and senior research fellow at George Mason University, Charles P. Blahous III.
- Reliance on younger generations – Benefits aren’t paid from savings but rather, they are collected by taxing the youth of today. While this program is sustainable when the population is growing, it deteriorates when population growth comes to a standstill or declines.
- Demographic shifts – As baby boomers enter retirement, there has been an increase in the ratio of beneficiaries to workers. Furthermore, as people begin to live longer in general, they will collect more benefits over time than their demographic might have done so in the past.
- Wage-indexing of the benefit formula – In the 1970s, the new system for calculating benefits was designed to account for inflation and general increases in wages across time. However, this system encountered problems since it was tied to average wages rather than actual price inflation (which tends to rise more slowly over time).
Solving Existing Problems
Fixing the current imbalance is actually rather straightforward – either Social Security must pay somewhat less in benefits or working Americans will need to pay more in taxes. Alternatively, legislators could implement some combination of both.
To increase revenue, the government could either increase the payroll tax rate or raise the cap on earnings. At the moment, people pay Social Security tax on the first $118,500 they earn each year. Some would propose raising this cap so that more well-off Americans would have to contribute a greater percentage of their earnings toward Social Security. Alternatively, simply increasing the tax rate would raise revenue from all working Americans. Depending on your political ideology, you may strongly prefer one option over the other. Given the intense political gridlock already present in American politics, it will be a struggle to achieve either option alone – and it will require serious compromise to achieve a balance between the two.
While it is also possible to cut benefits by raising the eligible age to receive Social Security, changing the cost-of-living adjustment, or flattening out the benefits received by those with higher incomes, none of these options will bode well with the people affected by these changes. If politicians begin to take away their benefits, they’ll also lose support from the electorate.
Predictions for the Future?
The earlier Congress takes action, the higher the chances that the program will be able to be salvaged in (more or less) its current form. However, the problem is not a lack of ideas but rather, the political cooperation required to accomplish compromise. But, as the timer runs out on current Social Security trust fund reserves, it is inevitable that Congress will have to take action sooner or later.
Although it is likely that serious changes will have to be made at some group’s expense, the program should continue to persist into the future. That said, the burden of retirement will likely fall heavily on the shoulders of individuals just as it did in the past. The takeaway message? Save more, save earlier.