The Real State of the Social Security Program

This is the first in a new series of columns about Social Security and retirement income planning.

Come 2024, the Social Security system will be in its 89th year of operation, and in many ways, the key federal retirement income insurance program is showing both its age and its continuing importance to the U.S. retirement landscape.

On the one hand, there is the program’s shaky financial future to consider, with an insolvency date for the big OASI retirement trust fund now projected sometime in the mid-2030s. Without changes, benefits could be cut 20% to 30%, or more, for the typical retiree.

On the other hand, the choice about claiming Social Security is rightly viewed as the single most important financial decision the typical middle income and even mass-affluent American makes in their lifetime. Social Security, as the adage goes, is the all-important third leg of the retirement stool — helping to keep older Americans upright alongside their private personal savings and their employer-sponsored pensions.

It is troubling, then, to consider that Social Security is seemingly faltering at the same time that defined benefit pensions are going the way of the dinosaur. It all raises the question: If Social Security fails in the 2030s and employers are no longer in the game of providing pensions, will individual Americans be left entirely on their own to prepare for retirement? 

It’s a scary prospect to be sure, but as the veritable Social Security guru Marcia Mantell recently told me, it’s also “never going to happen.”

“Social Security will be there for Americans when they retire, including the Gen Xers and millennials,” Mantell said. “It may look a little different from today’s benefits. Maybe benefits will be a little lower, or they will be means tested in new ways, but the program is too important and it has too much history to imagine that it will ever simply be allowed to disappear.”

Instead, Mantell and others say their real fear is that Americans may soon come to see Social Security as a problem that is too big to fix — either for fiscal or political reasons — when the reality is that solutions abound and there is far more public consensus than disagreement about what needs to be done.

A Crash Course in Social Security’s Funding Woes

With respect to Social Security’s solvency, one can get a good lay of the land from an analysis published earlier this year by the Committee for a Responsible Federal Budget, based on underlying data from both the Congressional Budget Office and the Social Security trustees.

As the CRFB report highlights, Social Security faces a budget shortfall equal to 4.9% of taxable payroll over the next 75 years. This shortfall is equal to 1.7% of GDP over that time, and the CBO’s projections posit that restoring solvency would require the equivalent of reducing projected benefits immediately and permanently by 26% or increasing dedicated taxes by 40%.

By 2096, according to the CBO data, the cash shortfall will rise to 7.4% of taxable payroll, the equivalent of 2.5% of GDP.

In addition to its solvency projections, the CRFB analysis also offers a blueprint for restoring Social Security’s long-term financial health, pointing to a variety of possible tax increases or benefit formula adjustments that could be undertaken, either alone or in concert, to put Social Security on a sounder financial footing.

Experts like Mantell and others say there is a worrying tendency developing among both the public and policymakers to focus on the scale of the problem rather than the wide range of potentially useful policy solutions that can be brought to bear to help correct the program’s fiscal path.